Finance can seem like a complex field to study.
• In a financial markets course, students are asked to develop their understanding of
many different types of financial instruments exchanged on different markets.
• Despite the complexity, there are some underlying principles that hold everything
together:
All financial instruments yield some amount of return while being
characterised by some amount of risk. Returns are positively
related to risk.
Supply
and
demand
The price of financial instruments is determined by supply and
demand. When supply goes up
This document provides an overview of the key components of the financial system. It discusses the six main parts of the financial system: money, financial instruments, financial markets, financial institutions, regulatory agencies, and central banks. It then describes the core principles of money and banking. Finally, it outlines the structure of the financial industry, including depository institutions like banks, and non-depository institutions like insurance companies, investment banks, and mutual funds.
Financial non-depository institutions are financial intermediaries that pool payments from individuals in the form of premiums, contributions, or property used as collateral for pawnshop loans. They include pension funds, securities firms, government agencies, finance companies, insurers, and smaller operations like pawnshops. Insurers may specialize in life insurance, annuities, or other types of coverage. Mutual funds pool investor money to purchase securities, while brokerages assist with stock and investment purchases either online or through branches.
The document defines finance and financial systems. It discusses the functions of money, different measures of money supply, and the roles of money lending, capital formation, and investment in the financial system. It also describes the evolution of financial systems from more rudimentary to indirect systems, the key components and markets within financial systems, and the functions of financial intermediaries, markets, and instruments.
Depository institutions include commercial banks, savings and loan associations, savings banks, and credit unions. They accept deposits and use the funds to make loans and invest in securities. Depository institutions face risks such as credit risk, regulatory risk, and funding risk. They are highly regulated due to their important role in the financial system and are afforded privileges like federal deposit insurance.
This document provides an overview of financial markets and institutions. It begins by defining key terms like financial systems and markets. It then describes different types of financial markets including capital markets, money markets, commodity markets, and more. It also outlines various financial institutions like commercial banks, investment banks, insurance companies, and others. The document discusses how funds flow through the financial system directly and indirectly. It also touches on important concepts like asymmetric information, free rider problems, and how financial development relates to economic growth. Finally, it introduces Minsky's financial instability hypothesis and how periods of stability can lead to increased risk-taking and potential financial crises.
This document provides an overview of finance and the financial environment. It defines finance and describes the six principles of finance, which include that money has a time value, higher returns require more risk, diversification reduces risk, markets are efficient, and reputation matters. It also outlines the components of the financial system, including institutions, markets, monetary policymakers, and their functions of accumulating savings, lending, and transferring financial assets. Several career opportunities in finance are also listed.
Introduction ot Mangerial Finance - Chapter 3 by: Scott Besley & Eugene BrighamKenji Silavi
This chapter discusses the financial environment, including financial markets, institutions, and investment banking. It describes how financial markets facilitate the flow of funds from savers to borrowers through direct transfers, investment banks, and financial intermediaries. The chapter also explains the roles of investment banks in facilitating capital raising and secondary market activities, as well as the various types and roles of financial intermediaries. Finally, it provides an overview of international financial markets and how they differ from those in the United States.
This document provides an overview of the key components of the financial system. It discusses the six main parts of the financial system: money, financial instruments, financial markets, financial institutions, regulatory agencies, and central banks. It then describes the core principles of money and banking. Finally, it outlines the structure of the financial industry, including depository institutions like banks, and non-depository institutions like insurance companies, investment banks, and mutual funds.
Financial non-depository institutions are financial intermediaries that pool payments from individuals in the form of premiums, contributions, or property used as collateral for pawnshop loans. They include pension funds, securities firms, government agencies, finance companies, insurers, and smaller operations like pawnshops. Insurers may specialize in life insurance, annuities, or other types of coverage. Mutual funds pool investor money to purchase securities, while brokerages assist with stock and investment purchases either online or through branches.
The document defines finance and financial systems. It discusses the functions of money, different measures of money supply, and the roles of money lending, capital formation, and investment in the financial system. It also describes the evolution of financial systems from more rudimentary to indirect systems, the key components and markets within financial systems, and the functions of financial intermediaries, markets, and instruments.
Depository institutions include commercial banks, savings and loan associations, savings banks, and credit unions. They accept deposits and use the funds to make loans and invest in securities. Depository institutions face risks such as credit risk, regulatory risk, and funding risk. They are highly regulated due to their important role in the financial system and are afforded privileges like federal deposit insurance.
This document provides an overview of financial markets and institutions. It begins by defining key terms like financial systems and markets. It then describes different types of financial markets including capital markets, money markets, commodity markets, and more. It also outlines various financial institutions like commercial banks, investment banks, insurance companies, and others. The document discusses how funds flow through the financial system directly and indirectly. It also touches on important concepts like asymmetric information, free rider problems, and how financial development relates to economic growth. Finally, it introduces Minsky's financial instability hypothesis and how periods of stability can lead to increased risk-taking and potential financial crises.
This document provides an overview of finance and the financial environment. It defines finance and describes the six principles of finance, which include that money has a time value, higher returns require more risk, diversification reduces risk, markets are efficient, and reputation matters. It also outlines the components of the financial system, including institutions, markets, monetary policymakers, and their functions of accumulating savings, lending, and transferring financial assets. Several career opportunities in finance are also listed.
Introduction ot Mangerial Finance - Chapter 3 by: Scott Besley & Eugene BrighamKenji Silavi
This chapter discusses the financial environment, including financial markets, institutions, and investment banking. It describes how financial markets facilitate the flow of funds from savers to borrowers through direct transfers, investment banks, and financial intermediaries. The chapter also explains the roles of investment banks in facilitating capital raising and secondary market activities, as well as the various types and roles of financial intermediaries. Finally, it provides an overview of international financial markets and how they differ from those in the United States.
Chapter 1 - Introduction to Finance.pdfPhanTunHng1
This document provides an outline and introduction to finance concepts from the textbook 'Finance' by Bodie and Merton. It defines finance as the study of allocating resources over time and outlines five core principles. It discusses the financial decisions households and firms must make regarding consumption, savings, investments, financing, and risk management. It also describes the global financial system, including the flow of funds from surplus spending units like households to deficit spending units like businesses through markets and financial intermediaries.
The document provides an overview of the financial system including why it is studied, key components like financial markets and institutions, and economic analysis of its structure and regulation. It describes financial markets and the functions of intermediaries like banks. It also analyzes how adverse selection, moral hazard, and government safety nets influence financial structure and regulation. Capital requirements, supervision, and both micro and macroprudential regulation help address these issues.
This document provides an overview of financial institutions and markets. It begins with definitions of key terms like financial markets, debt/interest rates, stock markets, and foreign exchange markets. It then discusses causes of financial crises like banking crises, asset bubbles, international crises, and regulatory failures. The document concludes that financial markets have significant impacts on individuals, businesses, and the overall economy, so it is important to understand these systems and how monetary policy works.
This document compares different types of investments based on their risk factors. Stocks generally carry higher risk than bonds but also higher potential returns. Mutual funds provide diversification and thus less risk than individual stocks. Real estate investments vary in risk depending on location and property type. Cryptocurrencies are highly speculative investments with significant risk of loss. Savings accounts and CDs are considered very low risk but also provide lower returns. Overall, higher risk investments like stocks offer greater return potential while lower risk options like bonds and savings accounts provide more stability but also lower returns.
Financial markets play a vital role in connecting individuals and firms with surplus funds (savers) to those with a need for funds (borrowers). They do this through the issuance and trading of financial instruments. There are various types of financial markets that facilitate the exchange of different financial assets, including primary markets for new issues, secondary markets for existing assets, money markets for short-term debt, and capital markets for longer-term debt and equity. Financial markets provide important benefits such as directing funds to their most productive uses, providing liquidity to savers, and stimulating both savings and borrowing.
This document provides background information on various financial institutions and instruments involved in the 2008 financial crisis. It discusses how banks operate by taking deposits and lending money, and the risks involved. It also describes mortgage-backed securities, collateralized debt obligations, credit rating agencies, and the roles played by investment banks, insurance companies, pension funds, and government regulators. The subprime mortgage crisis that helped trigger the 2008 crisis is also briefly explained.
This document provides an introduction to investments, including the concepts of investment, financial instruments like stocks, bonds, mutual funds, and non-financial instruments. It defines key terms like common stock, preferred stock, callable bonds, convertible bonds, and bond valuation. Examples are given to illustrate calculating discount on bonds when market price is lower than face value and premium on bonds when market price is higher.
Financial assets like stocks, bonds, and savings products allow people to save money and earn returns on their savings. These assets are traded in financial markets that connect savers to borrowers. There are several types of financial markets including money markets for loans under 1 year, capital markets for longer term loans, and primary markets where assets are first issued versus secondary markets where existing assets can be resold. Financial intermediaries like banks and brokerages facilitate the flow of funds between savers, borrowers, and financial markets.
Session 02 - Role of Financial Markets and Institutions.pptxExperimentalLab
1. Financial markets facilitate the flow of funds between surplus units and deficit units by transferring funds from those with excess funds to those who need funds. They allow corporations and governments to raise funds by issuing securities.
2. Financial institutions play a key role in financial markets by channeling funds from surplus units like households and corporations to deficit units in need of financing. Depository institutions like banks accept deposits and provide loans while non-depository institutions raise funds through other means like issuing securities.
3. Both depository and non-depository financial institutions help address imperfections in financial markets by evaluating borrowers, repackaging funds, and providing liquidity. They allow for efficient allocation of funds between surplus and deficit units
Mutual funds offer a convenient way to invest in a diversified portfolio of securities, managed by professional fund managers. However, before diving into the world of mutual funds, it is essential to understand the basics and learn how to manage the associated risks.
The document discusses mutual funds, providing definitions and explaining the structure and key participants. A mutual fund is an investment vehicle that pools money from investors to purchase securities like stocks and bonds. The structure involves a fund sponsor, trustees, an asset management company, custodian, and distributors. The document outlines the roles and responsibilities of these participants, as well as the history and types of mutual funds.
This document discusses financial markets and institutions. It begins by outlining the capital allocation process and defining direct and indirect financing. It then discusses various segments of financial markets, including money markets and capital markets. The document outlines what financial markets are, why they are important to study, and their key functions. It also defines different types of financial markets and instruments traded within them, such as money market securities, capital market securities, bonds, mortgages, and derivatives. Finally, it discusses financial institutions, defining them and their role in facilitating indirect finance between savers and borrowers.
The financial system channels funds from savers to borrowers through financial intermediation and markets. It improves economic efficiency by allocating capital to its most productive uses. The primary functions of the financial system are to transfer funds from lenders like households to borrowers like businesses, improve consumer well-being by allowing better timing of purchases, and produce an efficient allocation of capital contributing to higher economic production. Financial markets and intermediaries facilitate this process through direct financing in markets and indirect financing through intermediaries. Regulation aims to increase information to investors, ensure the soundness of intermediaries to prevent failures, and improve monetary control.
The document discusses the history and structure of mutual funds. It notes that the first mutual fund was created in the Netherlands in 1774. It then describes the key participants in a mutual fund like the board of directors, sponsor, custodian, investment advisor, transfer agent, and dealers. The document also outlines advantages like diversification and professional management, as well as disadvantages such as costs and taxes. Finally, it briefly discusses the different types of mutual funds and regulations around mutual funds.
1. Financial markets allow individuals and organizations to exchange financial assets and funds through intermediation. Money markets deal in short term debt up to 1 year, while capital markets trade longer term equity and debt.
2. Financial institutions serve as intermediaries in these markets since they are imperfect. Major institutions include commercial banks, savings institutions, credit unions, finance companies, mutual funds, securities firms, hedge funds, insurance companies and pension funds.
3. Interest rates are determined by the interaction of supply and demand in the loanable funds market. Factors like expected inflation, economic growth, and money supply influence rates by shifting supply and demand curves. The term structure of interest rates shows the relationship between yields of different term securities.
Fiduciary or paper money is issued by the Central Bank on the basis of
computation of estimated demand for cash. Monetary policy guides the Central
Bank’s supply of money in order to achieve the objectives of price stability (or low
inflation rate), full employment, and growth in aggregate income.
Mutual funds pool money from individual investors to purchase securities like stocks and bonds. They provide benefits like diversification and lower costs than individual investors can obtain. The mutual fund industry has grown dramatically in recent decades as more households invest in mutual funds for retirement. However, the industry has also faced scandals involving late trading, market timing, and other conflicts of interest between fund managers and investors.
This document outlines the topics to be covered in a lecture on money, banking, and the financial system. The lecture will introduce money and payments, examine the role of money in macroeconomics, explore financial markets and intermediaries, and discuss regulation of the financial system. It will define money, trace the evolution of payment systems, review measures of money supply and monetary aggregates, and explain how money influences business cycles, inflation, and interest rates. The functions of financial institutions and markets in channeling funds from savers to investors will also be covered.
This document provides information about mutual funds including their structure, types, history in India, advantages and disadvantages. It discusses that a mutual fund is a trust that collects money from investors and invests in stocks, bonds, money market instruments and other securities. The document outlines the key entities involved in mutual funds like sponsors, trustees, asset management companies, custodians and various distribution channels. It also summarizes the different types of mutual fund schemes and provides a brief history of mutual funds in India from 1964 to the present.
This document discusses mutual funds and provides information on their structure and types. It begins with defining a mutual fund as a pool of money collected from investors to invest in securities like stocks and bonds. It then describes the different types of mutual funds based on their investment objectives and structures. The rest of the document outlines the key participants involved in mutual funds like sponsors, trustees, asset management companies, custodians and distributors. It also briefly discusses the history, advantages, and disadvantages of mutual funds.
Navigating the world of forex trading can be challenging, especially for beginners. To help you make an informed decision, we have comprehensively compared the best forex brokers in India for 2024. This article, reviewed by Top Forex Brokers Review, will cover featured award winners, the best forex brokers, featured offers, the best copy trading platforms, the best forex brokers for beginners, the best MetaTrader brokers, and recently updated reviews. We will focus on FP Markets, Black Bull, EightCap, IC Markets, and Octa.
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https://rb.gy/usj1a2
Chapter 1 - Introduction to Finance.pdfPhanTunHng1
This document provides an outline and introduction to finance concepts from the textbook 'Finance' by Bodie and Merton. It defines finance as the study of allocating resources over time and outlines five core principles. It discusses the financial decisions households and firms must make regarding consumption, savings, investments, financing, and risk management. It also describes the global financial system, including the flow of funds from surplus spending units like households to deficit spending units like businesses through markets and financial intermediaries.
The document provides an overview of the financial system including why it is studied, key components like financial markets and institutions, and economic analysis of its structure and regulation. It describes financial markets and the functions of intermediaries like banks. It also analyzes how adverse selection, moral hazard, and government safety nets influence financial structure and regulation. Capital requirements, supervision, and both micro and macroprudential regulation help address these issues.
This document provides an overview of financial institutions and markets. It begins with definitions of key terms like financial markets, debt/interest rates, stock markets, and foreign exchange markets. It then discusses causes of financial crises like banking crises, asset bubbles, international crises, and regulatory failures. The document concludes that financial markets have significant impacts on individuals, businesses, and the overall economy, so it is important to understand these systems and how monetary policy works.
This document compares different types of investments based on their risk factors. Stocks generally carry higher risk than bonds but also higher potential returns. Mutual funds provide diversification and thus less risk than individual stocks. Real estate investments vary in risk depending on location and property type. Cryptocurrencies are highly speculative investments with significant risk of loss. Savings accounts and CDs are considered very low risk but also provide lower returns. Overall, higher risk investments like stocks offer greater return potential while lower risk options like bonds and savings accounts provide more stability but also lower returns.
Financial markets play a vital role in connecting individuals and firms with surplus funds (savers) to those with a need for funds (borrowers). They do this through the issuance and trading of financial instruments. There are various types of financial markets that facilitate the exchange of different financial assets, including primary markets for new issues, secondary markets for existing assets, money markets for short-term debt, and capital markets for longer-term debt and equity. Financial markets provide important benefits such as directing funds to their most productive uses, providing liquidity to savers, and stimulating both savings and borrowing.
This document provides background information on various financial institutions and instruments involved in the 2008 financial crisis. It discusses how banks operate by taking deposits and lending money, and the risks involved. It also describes mortgage-backed securities, collateralized debt obligations, credit rating agencies, and the roles played by investment banks, insurance companies, pension funds, and government regulators. The subprime mortgage crisis that helped trigger the 2008 crisis is also briefly explained.
This document provides an introduction to investments, including the concepts of investment, financial instruments like stocks, bonds, mutual funds, and non-financial instruments. It defines key terms like common stock, preferred stock, callable bonds, convertible bonds, and bond valuation. Examples are given to illustrate calculating discount on bonds when market price is lower than face value and premium on bonds when market price is higher.
Financial assets like stocks, bonds, and savings products allow people to save money and earn returns on their savings. These assets are traded in financial markets that connect savers to borrowers. There are several types of financial markets including money markets for loans under 1 year, capital markets for longer term loans, and primary markets where assets are first issued versus secondary markets where existing assets can be resold. Financial intermediaries like banks and brokerages facilitate the flow of funds between savers, borrowers, and financial markets.
Session 02 - Role of Financial Markets and Institutions.pptxExperimentalLab
1. Financial markets facilitate the flow of funds between surplus units and deficit units by transferring funds from those with excess funds to those who need funds. They allow corporations and governments to raise funds by issuing securities.
2. Financial institutions play a key role in financial markets by channeling funds from surplus units like households and corporations to deficit units in need of financing. Depository institutions like banks accept deposits and provide loans while non-depository institutions raise funds through other means like issuing securities.
3. Both depository and non-depository financial institutions help address imperfections in financial markets by evaluating borrowers, repackaging funds, and providing liquidity. They allow for efficient allocation of funds between surplus and deficit units
Mutual funds offer a convenient way to invest in a diversified portfolio of securities, managed by professional fund managers. However, before diving into the world of mutual funds, it is essential to understand the basics and learn how to manage the associated risks.
The document discusses mutual funds, providing definitions and explaining the structure and key participants. A mutual fund is an investment vehicle that pools money from investors to purchase securities like stocks and bonds. The structure involves a fund sponsor, trustees, an asset management company, custodian, and distributors. The document outlines the roles and responsibilities of these participants, as well as the history and types of mutual funds.
This document discusses financial markets and institutions. It begins by outlining the capital allocation process and defining direct and indirect financing. It then discusses various segments of financial markets, including money markets and capital markets. The document outlines what financial markets are, why they are important to study, and their key functions. It also defines different types of financial markets and instruments traded within them, such as money market securities, capital market securities, bonds, mortgages, and derivatives. Finally, it discusses financial institutions, defining them and their role in facilitating indirect finance between savers and borrowers.
The financial system channels funds from savers to borrowers through financial intermediation and markets. It improves economic efficiency by allocating capital to its most productive uses. The primary functions of the financial system are to transfer funds from lenders like households to borrowers like businesses, improve consumer well-being by allowing better timing of purchases, and produce an efficient allocation of capital contributing to higher economic production. Financial markets and intermediaries facilitate this process through direct financing in markets and indirect financing through intermediaries. Regulation aims to increase information to investors, ensure the soundness of intermediaries to prevent failures, and improve monetary control.
The document discusses the history and structure of mutual funds. It notes that the first mutual fund was created in the Netherlands in 1774. It then describes the key participants in a mutual fund like the board of directors, sponsor, custodian, investment advisor, transfer agent, and dealers. The document also outlines advantages like diversification and professional management, as well as disadvantages such as costs and taxes. Finally, it briefly discusses the different types of mutual funds and regulations around mutual funds.
1. Financial markets allow individuals and organizations to exchange financial assets and funds through intermediation. Money markets deal in short term debt up to 1 year, while capital markets trade longer term equity and debt.
2. Financial institutions serve as intermediaries in these markets since they are imperfect. Major institutions include commercial banks, savings institutions, credit unions, finance companies, mutual funds, securities firms, hedge funds, insurance companies and pension funds.
3. Interest rates are determined by the interaction of supply and demand in the loanable funds market. Factors like expected inflation, economic growth, and money supply influence rates by shifting supply and demand curves. The term structure of interest rates shows the relationship between yields of different term securities.
Fiduciary or paper money is issued by the Central Bank on the basis of
computation of estimated demand for cash. Monetary policy guides the Central
Bank’s supply of money in order to achieve the objectives of price stability (or low
inflation rate), full employment, and growth in aggregate income.
Mutual funds pool money from individual investors to purchase securities like stocks and bonds. They provide benefits like diversification and lower costs than individual investors can obtain. The mutual fund industry has grown dramatically in recent decades as more households invest in mutual funds for retirement. However, the industry has also faced scandals involving late trading, market timing, and other conflicts of interest between fund managers and investors.
This document outlines the topics to be covered in a lecture on money, banking, and the financial system. The lecture will introduce money and payments, examine the role of money in macroeconomics, explore financial markets and intermediaries, and discuss regulation of the financial system. It will define money, trace the evolution of payment systems, review measures of money supply and monetary aggregates, and explain how money influences business cycles, inflation, and interest rates. The functions of financial institutions and markets in channeling funds from savers to investors will also be covered.
This document provides information about mutual funds including their structure, types, history in India, advantages and disadvantages. It discusses that a mutual fund is a trust that collects money from investors and invests in stocks, bonds, money market instruments and other securities. The document outlines the key entities involved in mutual funds like sponsors, trustees, asset management companies, custodians and various distribution channels. It also summarizes the different types of mutual fund schemes and provides a brief history of mutual funds in India from 1964 to the present.
This document discusses mutual funds and provides information on their structure and types. It begins with defining a mutual fund as a pool of money collected from investors to invest in securities like stocks and bonds. It then describes the different types of mutual funds based on their investment objectives and structures. The rest of the document outlines the key participants involved in mutual funds like sponsors, trustees, asset management companies, custodians and distributors. It also briefly discusses the history, advantages, and disadvantages of mutual funds.
Navigating the world of forex trading can be challenging, especially for beginners. To help you make an informed decision, we have comprehensively compared the best forex brokers in India for 2024. This article, reviewed by Top Forex Brokers Review, will cover featured award winners, the best forex brokers, featured offers, the best copy trading platforms, the best forex brokers for beginners, the best MetaTrader brokers, and recently updated reviews. We will focus on FP Markets, Black Bull, EightCap, IC Markets, and Octa.
Discover timeless style with the 2022 Vintage Roman Numerals Men's Ring. Crafted from premium stainless steel, this 6mm wide ring embodies elegance and durability. Perfect as a gift, it seamlessly blends classic Roman numeral detailing with modern sophistication, making it an ideal accessory for any occasion.
https://rb.gy/usj1a2
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Profiles of Iconic Fashion Personalities.pdfTTop Threads
The fashion industry is dynamic and ever-changing, continuously sculpted by trailblazing visionaries who challenge norms and redefine beauty. This document delves into the profiles of some of the most iconic fashion personalities whose impact has left a lasting impression on the industry. From timeless designers to modern-day influencers, each individual has uniquely woven their thread into the rich fabric of fashion history, contributing to its ongoing evolution.
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1. UTS CRICOS 00099F
Topic 1:
Introduction to Capital Markets
University of Technology, Sydney
UTS Business School - Finance
2. 1.1 Lecture Outline
1. Theory and facts in finance
2. The financial system and financial institutions
3. Financial instruments
4. Financial markets
5. Flow of funds, market relationships and stability
6. The payment system
25741 Capital Markets
Topic 1: Introduction to Capital Markets
Ester Felez Vinas
3. 1.2 Theory and facts in finance
• Finance can seem like a complex field to study.
• In a financial markets course, students are asked to develop their understanding of
many different types of financial instruments exchanged on different markets.
• Despite the complexity, there are some underlying principles that hold everything
together:
Risk and
reward
Supply
and
demand
No
arbitrage
Time
value of
money
25741 Capital Markets
Topic 1: Introduction to Capital Markets
Ester Felez Vinas
4. 1.2 Theory and facts in finance
Risk and
reward
All financial instruments yield some amount of return while being
characterised by some amount of risk. Returns are positively
related to risk.
Supply
and
demand
The price of financial instruments is determined by supply and
demand. When supply goes up while demand remains the same or
falls, the price must decline.
25741 Capital Markets
Topic 1: Introduction to Capital Markets
Ester Felez Vinas
5. 1.2 Theory and facts in finance
No
arbitrage
A trader cannot buy a financial instrument in one market at a low
price while simultaneously selling that same asset at a higher
price in a different market. If so, the trader would earn infinite
returns at 0 risk (contradiction of risk-return trade off).
Time
value of
money
The value of $1 today is higher than the value of $1 later.
People are impatient to consume now and must be rewarded for
waiting. Where financial instruments represent a claim of future
cash flows, their current price must be the present value of those
cash flows.
25741 Capital Markets
Topic 1: Introduction to Capital Markets
Ester Felez Vinas
6. 1.2 Theory and facts in finance
• Financial systems exist to provide services that meet the community’s financial needs.
The most common needs are to make payments, to store and/or invest savings, and to
borrow funds for major purchases.
• A principal role of financial institutions and markets is to bring together providers of
funds – savers – with users of funds – borrowers. The flow of funds function is
performed by channelling savings from suppliers (surplus units) to users of funds (deficit
units)
Suppliers of
funds
(surplus units)
Users of funds
(deficit units)
Financial
markets
Lenders
supply funds
receive
financial instrument
Borrowers
receive funds
issue
financial instrument
25741 Capital Markets
Topic 1: Introduction to Capital Markets
Ester Felez Vinas
7. 1.2 Theory and facts in finance
The aim of this function is to efficiently use a financial system’s loanable funds.
Suppliers of funds expect to be rewarded by the users of funds. Where funds are lent,
the user is usually required to pay interests. This is because the suppliers are forgoing
the immediate use of their funds for consumption and are taking the risk that the users
of funds might not honour their promises.
Examples of this process:
• Purchase of shares from a company, which provides the company with
funds to enable it to implement its business plans.
• Depositing of savings with banks that enable the banks to make loans
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8. 1.3 Financial systems and financial institutions
A financial system comprises a range of financial institutions, financial
instruments and financial markets that facilitate the flow of funds.
The financial system operates under the supervision of the central bank – the
Reserve Bank of Australia – and the prudential supervisor – APRA (Australian
Prudential Regulation Authority)
Providers of funds should consider their own particular needs when investing on an
asset. For it, they should consider 4 important attributes of financial assets:
Return Risk Liquidity
Timing of
cash flows
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9. 1.3 Financial systems and financial institutions
Return Risk
Benefit received from an
investment (could be in the form
of interest and capital gain)
Uncertainty. Probability that an
actual outcome will vary from the
expected outcome.
Risk and return are positively related. This
is reasonable because an investor will not be
willing to take more risk to get the same
expected return as he would in an investment
that has lower risk.
Level of risk
Expected
rate
of
return
Risk-free
rate
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10. 1.3 Financial systems and financial institutions
Liquidity
Timing of
cash flows
Access to cash and other sources of funds to meet day-to-day expenses and
commitments. Liquidity is important because it determines the ability to get
cash fast to pay potential liabilities.
Example of an illiquid asset: an expensive painting.
A painting may be very valuable, but it is not liquid. This is because it is difficult to
sell fast at a market value. So, if one has many expensive paintings but needs cash
fast, he may be in high risk of default.
The frequency of periodic cash flows (interest and principal) associated with
a financial instrument.
Financial institutions and markets provide instruments with different combinations of risk,
return, liquidity and timing of cash flows that best suit each investor.
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11. 1.3 Financial systems and financial institutions
Individuals have different preferences with regards to these four attributes
Individuals can be: risk averse, risk neutral or risk takers. More risk-averse individuals accept
lower expected returns for bearing lower levels of risk. They don’t avoid risk entirely, but
demand higher return for bearing higher risk
Example: Consider I come to you with the following 2 scenarios:
• A guaranteed payout of some undisclosed (but negotiable) amount
• A payout not guaranteed, but that may result in 0 or 100
You have 2 options:
1. I will flip a coin and you have to guess whether it is going to be heads or tails. If you guess correctly
you get 100, else you get 0.
2. Abstain from the toss and take the guaranteed payment. The expected payout in scenario 2 is 50
((100+0)/2)
What will a risk-averse, risk-neutral and risk-taker do?
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12. 1.3 Financial systems and financial institutions
She will generally take the guaranteed payment. She believes that
something is better than nothing and would rather play it safe. Does this
mean she will always choose the guaranteed payout? NO. If the guaranteed
payout is very small then she would take the toss.
These type of investors tend to choose safer investments: e.g., saving
accounts, government bonds, whole-term life insurances
Risk-
averse
She will take the decision mathematically. Since the expected payout is 50,
the risk-neutral investor would choose the guaranteed payment if it is 50 or
more. Else, she flips the coin.
Risk-
neutral
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13. 1.3 Financial systems and financial institutions
She will take her chances with the coin flip unless she is offered a large
guaranteed payout. The keener the investor is for risk, the higher the
guaranteed payout has to be for her to take it. A risk-seeking investor prefers
tossing the coin rather than opting for the guaranteed payout of 50.
These investors tend to invest in speculative investments, junk bonds and
even gambling. The idea of making big appeals them, even though they may
also lose big.
Risk-
seeking
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14. 1.3 Financial systems and financial institutions
An efficient financial system encourages savings, which is important for economic
growth, and allocates these savings to the most efficient users of funds.
An efficient financial system provides timely and accurate economic and financial
information to the markets. An efficient financial system rapidly absorbs and reflects
the new information into prices.
The central bank uses the financial system to implement monetary
policy in order to target the level of inflation and achieve certain
economic objectives.
Inflation: Increase
in prices of goods
and services over
time. Measured by
the Consumer Price
Index (CPI)
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15. 1.3 Financial systems and financial institutions
There are five categories of financial institutions:
Depository
financial
institutions
Obtain funds from deposits lodged by savers and provide loans to
customers. Commercial banks are a clear example.
Provide advisory services (e.g. M&A, risk management, portfolio
restructuring, issue of equity) for their corporate and government clients. May
also provide loans to clients, but it is not their principal business. They are
more likely to advise their clients to obtain funding from the capital markets.
Offer financial contracts such as insurance and superannuation. In
return for a periodic payment made to the institution, the holder of the
contract gets a specified payout if, and when, an event specified in the
contract occurs.
Investment
banks
Contractual
saving
institutions
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16. 1.3 Financial systems and financial institutions
Finance
companies
and general
financiers
Raise funds by issuing financial instruments from the market and use
them to provide loans and lease finance to customers. The main
difference with depository financial institutions is that they get their fund from
issuing financial instruments in the money market or the capital market
rather than from client deposits.
Unit
trusts
Investors buy units issued by the trust. The pooled funds are then
invested in assets specified in the trust (e.g., an equity trust would invest in
certain types of shares). Trusts generally specialize in certain categories of
investments.
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17. 1.4 Financial markets
Financial markets are a key part of the financial system. To understand financial
markets we need to be aware of the following aspects:
Matching
principle
Primary &
secondary
market
transactions
Direct &
intermediated
finance
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18. 1.4.1 The matching principle
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Matching
principle
Short-term assets should be funded with short-term (money market) liabilities. For
example, seasonal inventory funded by overdraft.
Longer term assets should be funded with equity or longer term (capital market)
liabilities. For example equipment funded by debentures.
Ester Felez Vinas
Lack of adherence to this principle accentuated the effects of frozen money markets with the ‘sub-
prime’ market collapse during the GFC.
Talking markets and strategy
Following the Global Financial Crisis (GFC), it became clear that one of the key reasons financial institutions
got themselves into so much trouble was that they had not been following the matching principle.
Lehmann Brothers was one of the most prominent failures of the GFC and its collapse worsened the crisis.
Lehmann had borrowed very short term with many of its loans having maturities of as little as one day. It used
the funds to fund its enormous balance sheet. With $600 billion in assets, $572 billion in borrowings (i.e. just
$28 billion in shareholder equity) and with most of its borrowings needing to be renewed each day, is it any
wonder that Lehmann collapsed?
19. 1.4.2 Primary and secondary market transactions
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Primary
market
transactions
• The issue of a new financial instrument to raise funds to purchase goods, services
or assets by:
ü Businesses: issuing company shares or debentures
ü Governments: selling treasury notes or bonds
ü Individuals: entering into a mortgage
• Funds are obtained by the issuer of the security
• Economic growth is reliant on a strong primary market
Secondary
market
transactions
• The buying and selling of existing financial securities
• No new funds raised and therefore no direct impact on the original issuer of security
• Transfer of ownership from one saver to another saver
• Provides liquidity, which facilitates the restructuring of portfolios of security owners
and helps savers on their preferences for liquidity and aversion to risk
• A deep and liquid secondary market is one where there are many buyers and sellers
• The secondary market encourages savings and investment
20. 1.4.3 Direct and intermediated finance
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Direct
finance
• Users of funds obtain finance through the primary market via a direct relationship with providers
(savers).
• The borrower issues securities in a financial market and they are purchased by investors.
Advantages
ü Avoids costs of intermediation
ü Increases access to diverse range of markets
ü Greater flexibility in the range of securities
users can issue for different financing needs
ü Enhance international profile (reputation)
Disadvantages
ü Matching of preferences
ü Liquidity and marketability of a security
ü Search and transaction costs
ü Assessment of risk, especially default risk
21. 1.4.3 Direct and intermediated finance
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Intermediated
finance
Investors and borrowers deal indirectly with each other. The intermediary has an active role:
ü It acquires the ownership of the financial instrument that is created as part of the transaction
ü It also obtains the benefits and risks associated
Advantages
ü Asset transformation: Provide a range of products that meet customers’ varying portfolio preferences and needs
ü Maturity transformation: Borrowers and savers are offered products with a range of terms to maturity
ü Credit risk diversification and transformation: Saver’s credit risk limited to the risk of default of the intermediary.
Intermediary, (not the saver) which has expertise, is exposed to the credit risk of the ultimate borrower.
ü Liquidity transformation: Ability to convert assets into cash at current market price and low transaction cost.
ü Economies of scale: Financial and operational benefits of organisational size and business volume and expertise
22. 1.5 Flow of funds, market relationships and stability
When we introduced the flow of funds as a picture of the financial system, we said that the flow
was from savers to borrowers. We can imagine, also, funds flowing between the sectors of
the economy:
ü Funds flow between business, financial institutions, government and household sectors
and the rest of the world
ü Net borrowing and net lending of these sectors of an economy vary between countries
ü The flow of funds can be influenced by:
Ø the impact of fiscal and monetary policy on savings and investment decisions
Ø policy decisions like compulsory superannuation, which increased the flow of
funds between businesses, households and financial institutions dramatically
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23. 1.5 Flow of funds, market relationships and stability
The flow of funds between deficit and surplus units is an important contributor to economic
growth. For these benefits to be fully realised, the flow of funds must be characterised by
relative stability
The role of regulators is to balance the benefits of a free financial system against the costs
of instability. Worldwide, a set of global institutions play an important role in shaping and
managing the flow of funds across countries:
ü World Bank and the International Monetary Fund (IMF) can play an important role in
shaping the flow of funds into and out of developing countries.
ü Bank for International Settlements (BIS) has played a leading role in shaping banking
regulations around the world. For instance, requiring banks to hold more capital.
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24. 1.6 The payments system
Facilitates the transfer of value of a financial instrument from one party to another. An
economy’s payments system ensures funds can flow easily between transactors. The payments
clearing system in Australia is coordinated by the Australian Payments Network (AusPayNet).
Transactions may be either high-value or low-value:
• High-value: large-value transactions for assets (e.g. property, wholesale market equity, debt
securities and FX transactions)
• Low-value: day-to-day payments for goods and services, particularly by the household
sector.
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25. 1.6 The payments system
Transactions may also be made in cash or non-cash:
ü Cash: Notes and coins. The use of cash when making a payment is decreasing. However,
cash still seems to be the most used payment method for retail transaction
ü Cheques: A cheque is an instrument that instructs a bank to pay a specific amount from the bank
account of the cheque writer to a particular party. Least used form of non-cash payment and
declining each year in use.
ü Debit cards: Debit card users have funds taken directly from their bank accounts when they
make a payment.
ü Credit cards: The average value of credit card payments is higher than debit card payments. A
credit card user can avoid paying interest if their monthly outstanding balances are paid by a
certain date. However, annual fees and benefit fees (e.g. for frequent flyer points) are required on
some credit cards.
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26. 1.6 The payments system
Transactions may also be made in cash or non-cash:
ü Direct credits: credit payment through the internet. Over the internet the payer provides their
bank with the payment details and bank account of the intended recipient.
ü Direct debits: debit payment through the internet. The payer must provide authorisation over the
internet to request a direct-entry debit payment be made from their bank account to another
party. An easy way to pay mortgage payments and other regular bills
ü BPAY: similar to direct debit. A secure scheme introduced by financial institutions to pay bills over
the phone or internet
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27. 1.6 The payments system
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Over recent decades, there has been a trend rise in
the use of electronic payment methods for retail
transactions and a decline in ‘paper based’ methods
such as cash and cheques
Retail payments
Cash use is declining but it is still important. Although
the use of cash has continued to fall, a significant
minority of people still heavily rely on cash for many
of their payments (e.g., older Australians, people in low
income levels)
Cash payments
28. 1.6 The payments system
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Retail payments around the world
Consumers globally are shifting away from cash to
cards, although there are also some notable differences
across countries.
Sweden and Norway are prominent examples of countries
where cash is now used for a relatively small proportion of
consumer payments, whereas cash is still commonly used
in some Euro area countries like Spain and France.
29. 1.6 The payments system
The most recent developments in Australia’s payments system include the New Payments System
(NPP), which was publicly launched in February 2018, it facilitates real-time retail payments.
That is, following a retail transaction, funds are transferred in real time to the seller’s account. Also,
whereas an interbank fund transfer used to take overnight, it can now be facilitated instantly. This has
been called ‘fast payments’.
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In Australia, NPP transactions
picked up significantly over
2019/20 as financial institutions
progressed the rollout of core
functionality to end users.
The adoption of the NPP since its
launch, compares favourably with
the more successful fast
payments systems that have
been launched in other countries.
30. 1.6 The payments system
Exchange settlement accounts (ESA) are a special account held with the Reserve
Bank to facilitate the settlement of value transactions within the payments system.
These accounts are held by banks and other providers of payments services.
Applicants of the ESA are required to demonstrate that they have the ability to provide
ongoing liquidity for the operation of such account, especially in times of stress and
peak periods. Australian institutions are supervised by APRA and they are eligible for
ESAs.
Exchange settlement account transactions use same-day funds (funds not requiring
clearing through the payments system)
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31. 1.6 The payments system
Since June 1998, Australia operates a system of Real-Time Gross Settlement (RTGS) for the
clearing and settlement of high value transactions.
This requires that each high-value payment transaction be settled immediately through
exchange settlement accounts. RTGS are irrevocable
Purpose of RTGS: Reduce the risk that a high value transaction ends up not being settled,
which could put in high risk the stability of the financial system.
The Reserve Bank requires banks to maintain their exchange settlement accounts in credit with
same-day funds. To facilitate management of liquidity, the Reserve Bank provides intra-day
repurchase arrangement (repo agreement) for exchange settlement account holders.
A repo is the sale of eligible debt securities to the Reserve Bank on the condition that the seller
(financial institution) will normally buy them back by day’s end. It provides intra-day liquidity
for same-day funds for exchange settlement account holders.
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32. 1.7 Summary
ü Studying the financial markets can be intimidating because there seems to be a lot of
information to cover. Remember though that everything is held together by a few
fundamental principles: risk-reward, supply-demand, no arbitrage, time value of money.
ü Primarily, the financial system is organised to facilitate the flow of funds from savers to
borrowers. It has evolved, also, to facilitate portfolio composition according to particular
needs and to facilitate the operation of a central bank’s monetary policy.
ü Providers of funds should consider 4 important attributes of financial assets when investing
on an asset: return, risk, liquidity and timing of cash flows.
ü There are five categories of financial institutions: depository financial institutions,
investment banks, contractual saving institutions, finance companies and general financiers
and unit trusts.
ü To understand financial markets we need to be aware of the following 3 principles: matching
principle, primary and secondary market transactions and direct and intermediated finance.
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33. 1.7 Summary
ü The payments system facilitates the transfer of value from one party to another.
ü Over recent decades, there has been a rise in the use of electronic payment systems
and a decline of paper-based methods.
ü The most recent developments in Australia’s payments system include the New Payments
System (NPP), which facilitates real-time retail payments.
ü Exchange settlement accounts (ESA) are a special account held with the Reserve Bank
ü Australia operates a system of Real-Time Gross Settlement (RTGS) for the clearing and
settlement of high value transactions which has the purpose to reduce systemic risk and
increase certainty.
25741 Capital Markets
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Ester Felez Vinas