FIN111 Lecture Notes - Lecture 2: Root Mean Square, Eurobond, Corporate Bond
Week 2
Fin111 Lecture Notes
The Role Of The Financial System !
-The financial system consists of financial markets, institutions and money!
-The roles of the financial system are…!
•The facilitate the flow of funds!
•To provide a mechanism to settle transactions!
•To generate and disseminate information!
•To provide the means to transfer and manage risk!
•To provide ways of dealing with incentive problems!
The Flow of Funds!
-The financial system allows the flow of funds from surplus spending units (SSUs)
to deficit spending units (DSUs)!
-Suppliers of funds = SSUs!
-Demanders of funds = DSUs!
SSUs & DSUs!
-Economic units can be classified as…!
•Households!
•Business!
•Governments!
-A surplus unit is a unit whose income exceeds planned expenditure!
-A deficit unit is a unit whose expenditure exceeds its receipts!
-The flow of funds from (mainly to households) to (mainly to business firms and
governments) is a fundamental function of the financial system!
Direct Financing!
-SSUs lend money to DSUs and accept a financial claim in return!
-In direct financing this exchange takes place directly without an intermediary!
-The limitations of direct financing create a role for financial intermediaries to
intervene between DSU and SSU!
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Week 2
Indirect Financing!
-Direct financing requires DSUs to find SSUs that want direct claims and the
denominations involved are usually very large!
-These problems are resolved through the involvement of a financial intermediary!
-Financial intermediaries purchase direct claims from DSUs, transform them into
indirect claims and then sell them to SSUs.!
Benefits of Financial Intermediation!
-When intermediaries transform direct claims into indirect ones they perform five
services…!
1. Denomination divisibility!
2. Currency transformation!
3. Maturity flexibility!
4. Credit risk diversification!
5. Liquidity!
Types Of Intermediaries!
Commercial Banks!
-Commercial banks are the largest and most diversified intermediaries!
-Australian owned commercial banks hold more than $2 trillion in financial assets!
-These assets consist of loans to consumers, businesses and governments!
-Commercial banks liabilities consist of deposit accounts and other sources of
funds!
-Commercial banks might also be engaged in other activities such as underwriting!
Non-Bank Financial Corporations!
-NBFC’s provide many of the same services and products that commercial banks
provide!
-NBFC’s may be classified into four groups!
•Building societies!
•Credit unions!
•Money market corporations!
#2
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Document Summary
The nancial system consists of nancial markets, institutions and money. The nancial system allows the ow of funds from surplus spending units (ssus) to de cit spending units (dsus) Economic units can be classi ed as : households, business, governments. A surplus unit is a unit whose income exceeds planned expenditure. A de cit unit is a unit whose expenditure exceeds its receipts. The ow of funds from (mainly to households) to (mainly to business rms and governments) is a fundamental function of the nancial system. Ssus lend money to dsus and accept a nancial claim in return. In direct nancing this exchange takes place directly without an intermediary. The limitations of direct nancing create a role for nancial intermediaries to intervene between dsu and ssu. Direct nancing requires dsus to nd ssus that want direct claims and the denominations involved are usually very large. These problems are resolved through the involvement of a nancial intermediary.
