FINS1612 Lecture Notes - Lecture 1: Byrsonima Crassifolia, Credit Risk, Overdraft
Saturday, 11 March 2017
Capital Markets & Institution
Introduction
-Financial System: Range of financial institutions, instruments & markets - overseen by
central bank & supervised by prudential regulator
-Financial Instruments: Issued by a party raising funds, acknowledging a financial
commitment & entitling holder to specified future cash flows
-Surplus Units: Savers or providers of funds - available for lending & investment
•Rate of return - financial benefit gained from investment of savings
•Assets have four main attributes:
1. Return/ yield - total financial benefit (interest & capital gain) from an investment
2. Risk - possibility or probability than an actual outcome will vary from expected
outcome (uncertainty)
3. Liquidity - Access to cash & other sources of funds to meet day-to-day expenses
& commitments
4. Time-pattern of cash flows - frequency of periodic cash flows (interest & principal)
associated with a financial instrument
-Asset Portfolio: Combination of assets, each comprising the 4 attributes listed above
-Portfolio Structuring: Buying & selling of assets & liabilities to best meet current
savings, investment & funding needs
-Categories of Financial Institutions:
•Depository financial institutions - accept deposits & provide loans to customers (e.g.
commercial banks, credit unions)
•Investment banks - specialist providers of financial & advisory services to
corporations, high-net worth individuals & government
•Finance companies & general financiers - borrow funds direct from markets to
provide loans & lease finance to customers
•Unit trusts - investors buy units issued by trust; pooled funds invested (e.g. equity &
property trusts)
-Securitisation: Non-liquid assets are sold into a trust - trustee issues new securities &
cash flows from original securities used to repay new securities
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Saturday, 11 March 2017
-Equity:
•Ownership interest in an asset; ownership position relating to a corporation
•Ordinary share/ common stock - principal form of equity issued by corporations,
bestows rights to shareholder
•Dividend - part of a corporation’s profit distributed to shareholders
•Hybrid security - financial instrument incorporating characteristics of both debt &
equity (e.g. preference shares)
-Debt:
•Loan that must be repaid
•Debt instruments - entitle holder to claim to income stream produced by borrower &
to assets of borrower if borrower defaults on loan repayments
-Specify conditions of a loan agreement (amount, return, timing of cash flows,
maturity date)
•Secured debt - debt instrument that provides lender with claim over specified assets
if borrower defaults
•Negotiable debt instrument - debt instrument that can be sold by original lender
through a financial market (e.g. commercial bills)
-Derivatives:
•Synthetic security that derives its price from a physical market commodity or
security; used to manage risk exposures
•Do not provide actual funds to issuer
•Futures contract - exchange-traded agreement to buy or sell a specific commodity
or financial instrument at a specified price at a predetermined future date
•Forward contract - over-the-counter agreement that locks in a price (interest rate or
exchange rate) that will apply at a future date (more flexible)
•Option contract - gives right, but not obligation to buy or sell a commodity at a
predetermined price; option buyer pays a premium to option writer
•Swap contract - agreement between two parties to swap future cash flows; interest
rate & currency swaps
-Matching Principle:
•Short-term assets should be funded with short-term liabilities; longer-term assets
should be funded with longer-term liabilities & equity
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Saturday, 11 March 2017
•Overdraft facility - fluctuating credit facility provided by a bank; allows business
operating account to go into debt up to an agreed limit
•Bonds - long-term debt instrument issued directly into the capital markets that pays
the bond-holder periodic interest coupons & principle is repaid at maturity
-Primary Market Transactions:
•Issues of new financial instruments; funds obtained by issuer
-Secondary Market Transactions:
•Buying & selling of existing financial securities; transfer of ownership, no new funds
raised by issuer
•Securities - financial assets that are traded in a formal secondary market (e.g. stock
exchange)
-Direct Finance: (e.g. share issues, corporate bonds, government securities)
•Funding obtained directly from the money markets & capital markets
•Funds not provided by a financial institution
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Document Summary
Financial system: range of nancial institutions, instruments & markets - overseen by central bank & supervised by prudential regulator. Financial instruments: issued by a party raising funds, acknowledging a nancial commitment & entitling holder to speci ed future cash ows. & commitments: time-pattern of cash ows - frequency of periodic cash ows (interest & principal) associated with a nancial instrument. Asset portfolio: combination of assets, each comprising the 4 attributes listed above. Portfolio structuring: buying & selling of assets & liabilities to best meet current savings, investment & funding needs. Securitisation: non-liquid assets are sold into a trust - trustee issues new securities & cash ows from original securities used to repay new securities. Debt: loan that must be repaid, debt instruments - entitle holder to claim to income stream produced by borrower & to assets of borrower if borrower defaults on loan repayments.
