Financial market Tutorial question Topic 1 PDF

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FEEDBACK/TUTORIAL QUESTIONS Topic 1: Introduction to Financial Markets PART A 1.

Clearly distinguish between direct and indirect financing. Direct finance: 1.Funds are transferred directly from surplus economic units to deficit economic units 2.primarily financial asset are issued directly from deficit units to surplus units 3.Financial institutions play a role in direct finance by providing financial services, such as financial advice, underwriting, etc., in return for fees and commissions Indirect finance: Act as intermediaries, borrowing from surplus and lending to deficit.

2.

What are the advantages of indirect (intermediated) finance to:ppt28 -Advantages for borrowers and lenders: 1. Asset value transformation 2. Maturity transformation 3. Credit risk reduction and diversification 4. Liquidity provision -For The national economy. 1.Increased quantity of national saving 2.Greater access to savings by investor(liquidity) and borrower 3.Economic growth and development

-Disadvantages 1.Increased cost of funds for borrower 2.Reduced return from lending for savers 3.It is less likely for secondary financial asset to be securitised

3.

“Every time funds are lent and borrowed financial assets are created”. Explain The financial assets acknowledge the ability of the borrower -Represent a claim or a right that a surplus economic unit holds over a deficit economic unit. -A financial asset which has been issued by a deficit economic unit represent a liability or obligation.责任和义务 -Only if the funds are “given away” 放弃或送人 will no financial asset be created. Financial security

-A security is the term used to describe the financial asset that can be traded in an organized secondary market such as stock exchanged. -Ordinary share in a public listed company is a type of financial security. PART B 4.

Clearly distinguish between the primary and secondary finance markets for shares and government bonds. Ppt 22 Primary Market- Market in which financial asset are first created -funds flow from surplus economic unit to deficit economic unit Secondary Market- existing financial assets are traded - The change of ownership but not the lending or borrowing of funds (Equity-sell the share to new investor) - Deficit economic unit do not participate directly in secondary market transactions.

5.

Select two different financial assets and distinguish between them in terms of:

Bank deposit (a) Return- low, in the form of interest (b) Risk- low since interest is essentially guaranteed (c) liquidity –not very liquid if it is fixed deposit liquid if it is saving or cheque account (d) time pattern of return- return on regular interval, depending on the compounding frequent of interest.

Share a. Return- Variable but generally high, can be in form of dividend, capital gain or loss, b. Risk- High, sometimes do not receive dividend or capital loss. c. Liquidity- High in general as frequently traded shares are liquid. d.Time pattern of return-Not fixed or ordinary shares. But fixed for preference share.

6.

From the perspective of both surplus (lenders) and deficit (borrowers) economic units, clearly distinguish between debt and equity instruments. Debt-Represent contractual claims hold by the surplus economic unit on deficit unit, an obligation to repay the respective contract. Equity- Equity financial asset repeat ownership interest in companies (deficit unit) by surplus units. Equity holders claims are to the profit of the company and the net assets of the company if it is liquidated. It is a residual claim.

7.

What is the importance of an efficiently operating secondary market to the corresponding primary market? •

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8.

Efficiently operating secondary market is important to the corresponding primary market as it increases the flow of savings for investment in real capital by providing liquidity to financial assets and lowering credit risks to investors. Secondary markets also provide a price discovery mechanism which enables issuers of securities to determine the market value of those securities. This might be advantageous if they are contemplating new issues of the same security.

What is the role of ‘investment and merchant banks’ and ‘commercial banks’? Give example of each of them? investment and merchant banks Wholesale client Advising clients how to raise fund in the capital market. -Underwriting, -forex dealer, -financial advices. Merrill Lynch JP Morgan Fees and commissions

Commercial Banks Retail and Wholesale clients Mainly receive deposits and provide loans to clients. And also perform some - Underwriting -

Forex dealer

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Financial advises Commonwealth bank of Australia

Profit margin Fees and commissions...