MAF101 Lecture Notes - Lecture 7: Financial Instrument, Financial Institution, Interest
14 Jun 2018
School
Department
Course
Professor
MAF101 FUNDAMENTALS OF FINANCE
Kieu Trang Nguyen
Study notes
TOPIC 4 Valuation of Debt Part I- Lecture 7
*REVISION - FINANCIAL SYSTEM
A financial system comprises three principal elements which facilitate the flow of funds:
Financial assets/instruments (Topic 4)
Financial markets (Topic 5)
Financial institutions (Topic 5)
* FINANCIAL ASSETS - INSTRUMENTS
A Financial instrument or asset represents a claim to future cash flows.
• Most financial assets fall into two broad categories:
➢
1. EQUITY: represents ongoing ownership in a company. Most common type of equity is
the ordinary share. (Topic 4 Part II)
➢ 2. DEBT: a loan that obligates the borrower to pay periodic interest and repay the loan
amount at some future date
*THE STRUCTURE OF THE INVESTMENT PROCESS
An investment is the current commitment of money in the expectation of reaping future
benefits. In other words the purchase of an item in the hope that it increases in value or
provides a return in the future.
The investment process is the mechanism for bringing together suppliers of extra funds with
demanders who need funds, usually through a financial institution or a financial market.
*PARTICIPANTS IN THE INVESTMENT PROCESS
The three key participants (or economic units) in the investment process from Topic 1 are:
➢ Governments: can be borrowers and lenders, depending on the relationship between
tax revenue and government expenditures.
➢Businesses: usually are net borrowers. Firms raise capital now to pay for investment
in plant and equipment. Income generated from the real assets provides the returns to
investors who purchase the securities (financial assets) issued by firms.
➢Individuals: are usually net savers who purchase the securities issued by firms.
Each may act as a supplier and as a demander of funds. In general, government
and businesses are net demanders of funds whilst individuals are net suppliers of
funds.
*SUPPLIERS AND DEMANDERS OF FUNDS
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Topic 4 valuation of debt part i- lecture 7. A financial system comprises three principal elements which facilitate the flow of funds: A financial instrument or asset represents a claim to future cash flows: most financial assets fall into two broad categories: Debt: a loan that obligates the borrower to pay periodic interest and repay the loan the ordinary share. (topic 4 part ii) amount at some future date. An investment is the current commitment of money in the expectation of reaping future benefits. In other words the purchase of an item in the hope that it increases in value or provides a return in the future. The investment process is the mechanism for bringing together suppliers of extra funds with demanders who need funds, usually through a financial institution or a financial market. The three key participants (or economic units) in the investment process from topic 1 are: tax revenue and government expenditures.
