Chapter 12 Financial Markets

Roles of the APRA

1. Regulates institutions to ensure: - deposit-holders can take back their deposit money when they want - Insurance companies can meet their policy obligations - Superannuation funds can pay people who withdraw their savings 2. Sorts out the institution's financial position and ensuring that policy or deposit-holders receive as much of their funds as possible

The share market's effect on the economy

> Indicator of a country's economic conditions > Rise in share prices = economy is in good condition > Fall in share prices = economy is moving towards recession as well as fewer opportunities > Downturns/upturns measured by the All Ordinaries Index

Roles of the ASIC

> Monitors, investigates, and acts in situations where the integrity of the financial system has been undermined by the illegal acts of individuals or the creation of unethical investment products > Protects consumers against misleading or deceptive and unconscionable conduct affecting financial products and services > Lifts the standards of corporate behaviour and maintains confidence in financial markets > Typically has hundreds of investigations underway at any point in time

Role & function of the share market

> Provides an income for investors and a source of finance for businesses to invest and grow > Allows investors to: - Gain a stake in a company's profits -Make capital gains from increases in share prices - Access the right to vote for a company's board of directors: who ultimately decide how the company will maximise wealth > Provides an opportunity to raise new funds for investment and business growth > Acts as a method of allocating resources to different types of production

Australian Treasury

A Government department with the role of developing economic policy and prepares the Australian federal budget > Provides advice to governments on regulatory settings for financial markets, corporate practices, and consumer protection > Influences how governments devise budgets, collect taxes, allocate expenditure, and implement other policies (e.g. monetary policy, labour market policy, and market regulations)

Council of Financial Regulators

A coordinating body for financial market regulation that provides for cooperation and collaboration among its four members - the RBA, APRA, ASIC and Treasury

Non-bank financial Institutions (NBFI)

A financial institution that does not have a full banking license, or is not supervised by a national or international banking regulatory agency E.g. finance companies, merchant banks, credit unions, building societies, mortgage originators, and superannuation funds

A Float

A float occurs when a company lists itself on the stock exchange and offers its shares to the general public for the first time

Commonwealth Government Security

A form of borrowing where the Australian Government agrees to pay the holder a fixed sum of money over a period of time, and pays the face value of the security on maturity

Business Loans

A form of debt that allows businesses to invest in their business operations > E.g. new technology or the expansion of office space > Large corporations may pay around 1% more than housing loans > Small businesses may pay as much as 5% more than housing loans > In 2014, Australian businesses had $759 billion debt outstanding

Short-term money market

A market bringing together people and businesses with temporary shortages or surplus of funds > Those with surplus funds (e.g. banks), issue various forms of debt securities (e.g. bank bills or promissory notes) to those in need of funds > These debt securities all have a maturity date of less than one year

Secondary Markets

A market where financial securities are bought and sold according to investment transfers for investors managing a portfolio of shareholdings > Investors trade second-hand securities > Makes financial instruments initially sold on the primary market more attractive by increasing their liquidity > Determines the market price of the securities traded through the interaction of demand and supply

Bond market

A secondary financial market where bonds can be sold

All Ordinaries Index

A stock market index measuring changes in the overall value of companies listed on the Australian Securities Exchange

A share

A type of financial asset that provides an individual with ownership over part of a business or company

Bonds (Debt security)

A written financial document of a debt taken out by governments and large companies > The borrower sells a bond in return for a loan. The holder of a bond receives interest payments and the final repayment. > The bondholder is entitled to a fixed stream of income payments (aka coupon payments), which are like interest repayments, and to the repayment of the initial loan amount when the bond 'matures'

Financial Intermediaries

An organisation that takes money from households or firms and lends it to other households or firms

Securities

Any form of financial instrument including shares and bonds, that provide the holder of that instrument with a claim over real assets or a future income stream

Reserve Bank of Australia (RBA)

Australia's central bank > Responsible for the overall stability of the financial system > Created under the Reserve Bank Act 1959 > Guided by: - The stability of Australia's currency - The maintenance of full employment - The economic prosperity and welfare of the people of Australia

Roles of the RBA

Conducting monetary policy - With the aim of achieving a sustained low inflation rate while encouraging economic growth Systemic stability - Seeks to maintain longer-term stability by avoiding financial crises Control of note issue - The sole issuing authority for Australian currency Regulation of the payment system - Ensuring the efficiency and stability of payment methods (e.g. credit cards) Banker to the banks - Banks hold exchange settlement accounts with the Reserve Bank. These accounts allow banks to settle debts between themselves Holds Australia's reserves of gold and foreign currency dealings - Provide the funds used to make international payments or for RBA operations in the foreign exchange market - Overseas dealers in the foreign exchange market

Credit

Loans to individuals, businesses and governments for spending on consumption and investment

Housing Loans

Long-term loads to purchase property, requiring periodic repayments with interest > Housing loan rates are typically 1-2% higher than the Reserve Bank cash rate > In 2014, Australian households had outstanding borrowings of $920 billion for the purpose of owner-occupied housing

Primary market

Market whre financial securities such as debt, shares, bonds and options are issued for the first time. > the issuing company directky sells new securities to investors > Allows companies and governments to issue bonds or debentures in the fixed interest market, as well as shares and options in the equities market

Speculation

Occurs when investors buy assets with the intention of re-selling them for a higher price within a short period

Market operations

Reserve Bank activity in the money market, in implementing monetary policy, through targeting the cash rate

The Bondholder of a bond

The Lender

The Issuer of a bond

The borrower

Debt Service

The cash that is required for a particular time period, to cover the repayment of interest and principal on a debt > Often calculated on a yearly basis > For individuals, often includes financial obligations such as mortgage and student loans

Financial Innovation

The development of new financial products and methods of borrowing and lending

Cash Rate

The equilibrium interest rate in the market for exchange settlement funds, also referred to as the money market > Targeted by the Reserve Bank through market operations

Global Debt Markets

The exchange of funds, borrowing and lending, on a global scale

The Share Market

The financial market where investors buy and sell shares > For a firm to issue shares, it must be a company (incorporated)

Reserve Prudential Regulation Authority (APRA)

The government body established to regulate all deposit-taking institutions, life and general insurance organisations and superannuation funds

Australian Securities and Investments Commission (ASIC)

The government body with responsibility for corporate regulation, consumer protection and the oversight of financial service products

Central Banking Authorities

The institutions established by each state and territory government to provide finance for public corporations, quasi-corporations and other units owned or controlled by those governments > Borrow funds (by issuing securities) > May engage in the financial management activities of the parent government

Australian Securities Exchange (ASX)

The major share market in Australia, where the purchase and sale of most shares in public companies occur

Foreign exchange/ forex market

The market for buying and selling foreign currencies > The forex market provides a market for people to buy and well currencies. Operates 24 hours/day

Futures Market

The market where agreements that commodities and other products will be bought or sold at a later date, at a fixed price, determined at the time that the contract is agreed to

Real Interest Rate

The nominal interest rate adjusted to compensate for inflation

Currency

The notes and coins in circulation in the economy > Currency accounts for approx. 5% of the Reserve Bank's definition of the money supply

Dividends

The profit returns received by the shareholders (owners) of a business

Capital Gains

The profits made by investors who sell their shares or assets at a price above the level that they originally paid for

The Yield of a bond

The rate of financial return on a bond > Calculated by dividing the coupon payment by the bond price

The Face Value of a bond

The size and initial price of the bond

Domestic Market

The supply and demand of goods, services, and securities within a single country > Also referred to as an internal market, or domestic trading

Debt

Whatever is owed, be it money, goods, or services, by one person or organisation to another

Insider Trading

Where company directors use non-public information about the company to buy and sell shares on the share market to make a profit; and company executives fail to inform the market of price-sensitive information

The Debt Market

Where debt instruments (securities) are exchanged, or cash is lent or borrowed > Mortgages, personal loads, debentures, bonds, notes and bills are issued at a fixed or variable rate of interest

The Foreign Exchange Market

Where financial assets defined in one country's currency are exchanged for assets define in another country's currency

Share/equity market

Where ownership shares in companies are issued or exchanged

Derivatives Market

Where people buy and sell financial assets that are based on the value of other financial assets