Tài chính doanh nghiệp - Chapter 1: The financial system

PowerPoint Slides to accompany Financial Institutions, Instruments and Markets Fourth Edition by Christopher VineyDesigned and Written by Anthony StangerSchool of CommerceThe Flinders University of South AustraliaCopyright  2003 McGraw-Hill Australia Pty LtdCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter 1The Financial SystemWebsites:Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonLearning ObjectivesExplain the functions of a financial systemDescribe the main classes of financial instruments issued in a financial systemDistinguish between various types of financial markets according to functionDiscuss the flow of funds between savers and borrowers, including direct and intermediated financeCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonLearning Objectives (cont.)Appreciate the influence of globalisation on financial marketsCategorise the main types of financial institutionsUnderstand the impact of a financial crisis on a financial system and a real economyCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation1.1 Introduction1.2 Functions of the Financial System1.3 Financial Instruments1.4 Financial Markets1.5 Impact of Globalisation1.6 Financial Institutions1.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.1 IntroductionMoneyMedium of exchangeAllows specialisation in productionSolves the divisibility problem, i.e. where medium of exchange does not represent equal value for the parties to the transactionFacilitates savingStore of wealthCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.1 Introduction (cont.)Role of marketsFacilitate exchange byBringing opposite parties togetherEstablishing rates of exchange, i.e. pricesSurplus unitsSavers of funds available for lendingDeficit unitsBorrowers of funds for capital investment and consumptionCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.1 Introduction (cont.)Financial instrumentIssued by a party raising funds, acknowledging a financial commitment and entitling holder to specified future cash flowsFlow of fundsMovement of funds through the financial system between savers and borrowers giving rise to financial instrumentsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.1 Introduction (cont.)Financial systemFinancial institutions, instruments and markets facilitating transactions for goods and services and financial transactionsOvercomes difficulty ofDouble coincidence of wantsTransaction between two parties meets their mutual needsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.1 Introduction (cont.)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation1.1 Introduction1.2 Functions of the Financial System1.3 Financial Instruments1.4 Financial Markets1.5 Impact of Globalisation1.6 Financial Institutions1.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.2 Functions of the  Financial SystemAttributes of financial assetsReturn or yieldTotal financial compensation received from an investment expressed as a percentage of the amount investedRiskProbability that actual return on an investment will vary from the expected returnCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.2 Functions of the  Financial System (cont.)LiquidityAbility to sell an asset within reasonable time at current market prices and for reasonable transaction costsTime-pattern of the cash flowsWhen the expected cash flows from a financial asset are to be received by the investor or lenderCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.2 Functions of the  Financial System (cont.)The financial system facilitates portfolio restructuringThe combination of assets and liabilities comprising the desired attributes of return, risk, liquidity and timing of cash flowsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.2 Functions of the  Financial System (cont.)An efficient financial systemEncourages savingsSavings flow to the most efficient usersImplements the monetary policy of governments by influencing interest ratesThe combination of assets and liabilities comprising the desired attributes of return, risk, liquidity and timing of cash flowsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation1.1 Introduction1.2 Functions of the Financial System1.3 Financial Instruments1.4 Financial Markets1.5 Impact of Globalisation1.6 Financial Institutions1.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.3 Financial InstrumentsEquityOwnership interest in an assetResidual claim on earnings and assetsDividendLiquidationTypesOrdinary shareHybrid (or quasi-equity) securityPreference sharesConvertible notesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.3 Financial Instruments (cont.)DebtContractual claim toPeriodic interest paymentsRepayment of principalRanks ahead of equityCan be secured or unsecuredCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.3 Financial Instruments (cont.)DerivativesA synthetic security providing specific future rights that derives its price from aPhysical market commodityGold and oilFinancial securityInterest rate-sensitive debt instruments, currencies and equitiesUsed mainly to manage price risk exposure, and to speculate Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.3 Financial Instruments (cont.)Four basic derivative contractsFutures (Chapter 18)Forward (Chapter 18)Option contract (Chapter 19)Swap (Chapter 20)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation1.1 Introduction1.2 Functions of the Financial System1.3 Financial Instruments1.4 Financial Markets1.5 Impact of Globalisation1.6 Financial Institutions1.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.4 Financial MarketsMatching principlePrimary and secondary market transactionsDirect and intermediated financial flow marketsWholesale and retail marketsMoney marketsCapital marketsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonMatching principleShort-term assets should be funded with short-term liabilitiesInventory funded by overdraftLonger-term assets should be funded with equity or longer-term liabilitiesEquipment funded by debenturesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonPrimary and secondary market transactionsPrimary market transactionThe issue of a new financial instrument to raise funds to purchase goods, services or assets byBusinessesCompany shares or debenturesGovernmentsTreasury notes or bondsIndividualsMortgageCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonPrimary and secondary market transactions (cont.)Secondary market transactionThe buying and selling of existing financial instrumentsNo direct impact on original issuer of securityTransfer of ownership from one saver to another saver Provides liquidity which facilitates restructuring of portfolios of security ownersCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonDirect and intermediated financial flow marketsDirect flow marketsUsers of funds obtain finance directly from savers AdvantagesAvoids costs of intermediationIncreases range of securities and marketsDisadvantagesMatching of preferencesLiquidity and marketability of a securitySearch and transaction costsAssessment of risk, especially default riskCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonDirect and intermediated financial flow markets (cont.)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonDirect and intermediated financial flow markets (cont.)Intermediated flow marketsA financing arrangement involving two separate contractual agreements whereby saver provides funds to intermediary, and the intermediary provides funding to the ultimate user of fundsAdvantagesAsset transformationMaturity transformationCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonDirect and intermediated financial flow markets (cont.)Advantages (cont.)Credit risk diversification and transformationLiquidity transformationEconomies of scaleSectorial flow of fundsThe flow of funds between business, financial institutions, government and household sectors and the rest of the worldInfluenced by fiscal and monetary policyCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonDirect and intermediated financial flow markets (cont.)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonWholesale and retail marketsWholesale marketsDirect financial flow transactions between institutional investors and borrowersInvolves large transactionsRetail marketsTransactions conducted primarily with financial intermediaries by the household and small- medium business sectorsInvolves smaller transactionsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonMoney marketsWholesale markets in which short-term securities are issued and tradedSecurities highly liquidTerm to maturity of one year or lessHighly standardised formDeep secondary marketNo specific infrastructure or trading placeEnable participants to manage liquidityCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonMoney markets (cont.)Money market securitiesCash deposits (11 a.m. and 24-hour call)Commercial billsTreasury notesGovernment bondsPromissory notesIntercompany loansInterbank loansCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonMoney markets (cont.)Money market participantsReserve BankFinancial system liquidityImplementation of monetary policyBanksFinance companiesFunds managersBuilding societiesCredit unionsCompaniesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonMoney markets (cont.)Money market sub-marketsIntercompany marketInterbank marketBills marketCommercial paper marketNegotiable certificates of deposit (CDs) marketCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonCapital marketsMarkets in which longer-term securities are issued and tradedEquity marketsCorporate debt marketsGovernment debt marketsForeign exchange marketsDerivatives marketsTerm to maturity of more than one yearCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation1.1 Introduction1.2 Functions of the Financial System1.3 Financial Instruments1.4 Financial Markets1.5 Impact of Globalisation1.6 Financial Institutions1.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.5 Impact of GlobalisationGlobalisation of financial marketsRefers to the interdependence of national financial systemsGlobal standardisation of financial instrumentsFacilitates the movement of funds between savers and borrowers in different countriesCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation1.1 Introduction1.2 Functions of the Financial System1.3 Financial Instruments1.4 Financial Markets1.5 Impact of Globalisation1.6 Financial Institutions1.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.6 Financial InstitutionsFinancial institutions permit the flow of funds between borrowers and lenders by facilitating financial transactionsInstitutions may be categorised by differences in the sources and uses of fundsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.6 Financial Institutions (cont.)Categories of financial institutionsDepository financial institutionsInvestment banks and merchant banks (money market corporations)Contractual savings institutionsFinance companiesUnit trustsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonCategories of financial institutionsDepository financial institutionsAttract savings from depositors and investors to provide loan facilities to borrowersCommercial banks Building societiesCredit unionsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonCategories of financial institutions (cont.)Investment banks and merchant banks(money market corporations)Mainly provide off-balance-sheet (OBS) transactions to corporations and governmentAdvice on mergers and acquisitions, portfolio restructuring, finance and risk managementProvide some fundingCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonCategories of financial institutions (cont.)Contractual savings institutionsThe liabilities of these institutions are contracts that specify, in return for periodic payments to the institution, the institution will make payments to the contract holders if a specified event occursFunds are then used to purchase both primary and secondary market securitiesLife and general insurance companiesSuperannuation fundsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonCategories of financial institutions (cont.)Finance companiesFunds are raised by issuing financial securities direct into money markets and capital marketsFunds are used to make loans to ultimate borrowersCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonCategories of financial institutions (cont)Unit trustsInvestors purchase units in the trustTrust manager invests funds in a range of investments specified by trust deedTypes of unit trustsCash management trustsEquity trustsProperty trustsMortgage trustsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.6 Financial Institutions (cont.)Assets of financial institutionsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation1.1 Introduction1.2 Functions of the Financial System1.3 Financial Instruments1.4 Financial Markets1.5 Impact of Globalisation1.6 Financial Institutions1.7 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.7 SummaryThe financial system is composed of financial institutions, instruments and markets facilitating transactions for goods and services and financial transactionsFinancial instruments may be equity, debt or hybridCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson1.7 Summary (cont.)Financial markets may be classified according toPrimary and secondary transactionsDirect and intermediated flowsWholesale and retail marketsMoney markets and capital marketsFinancial institutionsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson