01 - Financial System

  1. Sub-prime Mortgages
    Loans to borrowers that under normal credit assessment standards would not have the capacity to repay.
  2. Eurozone (Sovereign Debt) Crisis
    The economic and international financial crisis that followed the GFC.
  3. Financial System
    Comprises a range of financial institutions, instruments and markets.

    Overseen by central bank.

    Supervised by prudential regulator.
  4. Financial Instruments
    Issued by a party raising funds, acknowledging a financial commitment and entitling the holder to specified future cash flows.
  5. Flow of Funds
    Movement of funds through a financial institution.
  6. Surplus Units
    Savers or providers of funds.

    Funds are available for lending or investment.
  7. Rate of Return
    The financial benefit gained from investment of savings (%).
  8. Return (Yield)
    The total financial benefit received (interest and capital gain) from an investment (%).
  9. Risk
    The possibility or probability that an actual outcome will vary from the expected outcome (uncertainty).
  10. Liquidity
    Access to cash and other sources of funds to meet day-to-day expenses and commitments.
  11. Time-pattern of Cash Flows
    The frequency of periodic cash flows (interest and principle) associated with a financial instrument.
  12. Asset Portfolio
    A combination of assets, each comprising attributes of return, risk, liquidity and timing of cash flows.
  13. Portfolio Structuring
    The buying and selling of assets and liabilities to best meet current savings, investment and funding needs.
  14. Monetary Policy
    Actions of a central bank that influence the level of interest rates in order to achieve economic outcomes.

    Primary target is inflation.
  15. Inflation
    An increase in prices of goods and services over time.

    Measure by the Consumer Price Index (CPI).
  16. Depository Financial Institutions
    Accept deposits and provide loans to customers (commercial banks, credit unions).
  17. Investment Banks
    Specialist providers of financial and advisory services to corporations, high-net-worth individuals and government.
  18. Contractional Savings Institutions
    Offer financial contracts such as insurance and superannuation (large investors).
  19. Finance Companies and General Financiers
    Borrow funds direct from markets to provide loans and lease finance to customers.
  20. Unit Trusts
    Investors buy units issued by the trust.

    Pooled funds invested (equity trust, property trust).
  21. Securitisation
    • - Non-liquid assets are sold into a trust.
    • - The trustee issues new securities.
    • - Cash flows from the original securities are used to repay the new securities.
  22. Equity
    The sum of the financial interest an investor has in an asset (an ownership position).
  23. Ordinary Share (Common Stock)
    The principle form of equity issued by a corporation.

    Bestows certain rights to the shareholder.
  24. Dividend
    That part of a corporation's profit that is distributed to shareholders.
  25. Hybrid Security
    A financial instrument that incorporates the characteristics of both debt and equity (preference shares).
  26. Liquidation
    The legal process of winding up the affairs of a company in financial distress.
  27. Debt Instruments
    Specify conditions of a loan agreement.

    Issuer/borrower, amount, return, timing of cash flows, maturity date.

    Debt must be repaid.
  28. Secured Debt
    A debt instrument that provides the lender with a claim over specified assets if the borrower defaults.
  29. Negotiable Debt Instrument
    A debt instrument that can be sold by the original lender through a financial market.
  30. Derivative Instrument
    A synthetic security that derives its price from a physical market commodity or security.

    Mainly used to manage risk exposures.
  31. Forward Contract
    An over-the-counter agreement that locks in a price (interest or exchange rate) that will apply at a future date.
  32. Swap Contract
    An agreement between two parties to swap future cash flows (interest rate swap, currency swap).
  33. Matching Principle
    Short-term assists should be funded with short-term liabilities.

    Long-term assets should be funded with long-term liabilities and equity.
  34. Overdraft Facility
    A fluctuating credit facility provided by a bank.

    Allows a business operating account to go into debit up to an agreed limit.
  35. Broker
    An agent who carries out the instructions of a client.
  36. Dealer
    Makes a market in a security by quoting both buy (bid) and sell (offer) prices.
  37. Credit Rating
    The assessment by a credit rating agency of the creditworthiness of an obligator to a financial obligation.
  38. Default Risk
    The risk that a borrower may not meet financial commitments (loan repayments). when they are due.
  39. Intermediated Finance
    Financial transaction conducted with a financial intermediary (bank deposit, bank loans).

    Seperate contractual agreements.
  40. Asset Transformation
    The ability of financial intermediaries to provide a range of products that meet customers' portfolio preferences.
  41. Maturity Transformation
    Financial intermediaries offer products with a range of terms to maturity.
  42. Liability Management
    Banks actively manage their sources of funds (liabilities) in order to meet future loan demands (assets).
  43. Credit Risk Transformation
    A saver's credit risk exposure is limited to the intermediary.

    The intermediary is exposed to the credit risk of the ultimate borrower.
  44. Liquidity Transformation
    Measured by the ability of a saver to convert a financial instrument into cash.
  45. Economies of Scale
    Financial and operational benefits gained from organisational size, expertise and volume of business.
  46. Wholesale Market
    Direct financial flow transactions between institutional investors and borrowers.
  47. Retail Market
    Financial transactions conducted with financial intermediaries mainly by individuals and small to medium sized businesses.
  48. Money Markets
    Wholesale markets in which short-term securities are issued and traded.
  49. Institutional Investors
    Participants in the wholesale markets (funds managers, insurance offices, banks).
  50. Inter-bank Market
    The lending and borrowing of very short-term funds by banks operating in the payments system.
  51. Discount Securities
    Short-term securities issued with a face value payable at maturity.

    Do not pay interest.

    Sold today at a discount to the face value.
  52. Bills Market
    An active money market for the issue and trading of bills of exchange (discount securities).
  53. Commercial Paper
    Promissory notes (discount securities) issued into the money market by corporations with a good credit rating.
  54. Negotiable Certificate of Deposit
    A discount security issued by a bank.
  55. Capital Markets
    Markets for longer-term funding.

    Includes equity, corporate debt and government debt.

    Is supported by the foreign exchange and derivatives.
  56. Equity Market
    Facilitate the issue of financial securities that represent an ownership interest in an asset (stock market).
  57. Corporate Debt Market
    Facilitate the issue and trading of debt securities issued by corporations (discount securities, bonds).
  58. Euromarket Instruments
    Financial transactions conducted in a foreign country in a currency other than the currency of that country.
  59. Government Debt
    Government borrowing for short-term liquidity needs, or longer-term budget capital expenditure (T-notes, treasury bonds).
  60. Crowding Out
    Government borrowing that reduces the net amount of funds available for other lending in the financial system.
  61. Foreign Exchange Markets
    Facilitate the buying and selling of foreign currencies.
  62. Derivatives Markets
    Markets in synthetic risk management products (futures, forwards, options, swaps).
  63. Deficit Units
    Borrowers or users of funds.
  64. Sectorial Flow of Funds
    The flow of funds between surplus and deficit sectors in an economy.

    • Business
    • Financial
    • Government
    • HouseholdĀ 
    • Rest-of-the-world Sectors
  65. Fiscal Policy
    The management of annual revenues and expenditures of a government.
  66. Compulsory Superannuation
    Employers must contribute minimum specified amounts into retirement savings for employees (Australia)
Card Set
01 - Financial System
230 - Financial System