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What is a financial system

represents all markets, institutions,
laws, regulations & techniques through which financial
assets are created & traded, interest rates determined &
financial services produced & delivered around the world.


What is a sercurity

Financial asset that is tradable e.g. a share of a company,
debt instruments e.g. company bond or debenture


1) what is a primary market

A primary market issues new securities on an exchange for companies, governments and other groups to obtain financing through debt-based or equity-based securities


1a) what is direct finance

Is when funds flow from savers to lenders


1a) what are the advantages of direct finance

avoids cost of intermediation
• Borrowers access different financial markets & financial


1a) what are the disadvantages

matching of preferences & asymmetric information
• Often illiquidity of secondary market
• search & transaction costs high –timing problems
• assessment of risk (e.g. default) not easy


What is asymmetric info

occurs when one party to an economic transaction possesses greater material knowledge than the other party


1b) what is indirect finance

funds flow with help of investment banks, security brokers &
dealers who aid in sale of direct claims against borrowers (but
no new assets are created by investment bank


1b) differemce between broker & dealer markets

Broker: agents for investors who match buyer & sellers (for
a fee - don’t own the assets)

Dealer: people who link buyers & sellers by buying &
selling at stated prices (market makers= make a market)


1c) what is Intermediated finance

Flow of funds through financial intermediary


1c) advantages of intermediated finance

-asset transformation–wide range of financial products
-maturity transformation- deposits of short periods to
longer period loans
-credit risk diversification (or transformation)
- economies of scale due to size & business volume


1c) Main advantage of intermediated finace

Overall, intermediation = usual way to finance businesses as
adverse selection & moral hazard are reduced (asymmetric info)


2) what is a secondary market

Secondary markets are used to trade existing securities


3) what is a wholesale market

Wholesale markets involve large transactions
( usually $100,000) between institutional investors &
borrowers or large investors


3) What is retail market

Retail markets generally involve the transactions of
households & small business sectors using financial


What have financial intermediaries created expertise in?

-Lowering transaction costs & taking advantage of
economies of scale
-in monitoring
the parties they lend to (by gathering info about potential
borrowers) & so manage their risk


definition of Financial Institutions

permit the flow of funds between borrowers & lenders by assisting financial transactions


examples of Depository Financial Institutions

- Banks
– Building Societies
– Credit Unions


functions of Depository Financial Institutions

Attract savings from depositors (deposits = bank liabilities) &
investors to provide loans (= bank assets) to borrowers
• Create NEW financial assets (loans) as part of transaction
• These new assets (Loans) provide benefits (income from
interest payments & repayment of principal) but risks (e.g.
default by borrower & interest rate)


definition of Contractual Institutions & Non-depository

The sources of funds (liabilities) of these institutions are
contracts that generate periodic cash flows & are then used
to purchase both primary & secondary market securities


example of contractual institutions

Insurance companies


example of non-depository institutions

– Superannuation (Pension)Funds NZ Superannuation
Fund: Home
– Finance companies UDC Finance Limited
– Investment banks (Money market Corporations)
– Managed funds (Unit Trusts)