Financial Institution and Financial Markets - Assignment Example

Financial Institution and Financial Markets Name Institution Name Date Question 1 (A). Categorize and describe the main types of financial institutions that play an important role a modern and efficient financial system. A financial institution is a structure or establishment, which is responsible for conducting financial transactions such as deposits, loans, and investments (Agarwal, Liu & Rhee, 2008). The financial institutions also play an important role in exchanging currencies and numerous processes associated with financials. In Australia, the main types of financial institutions are the authorized deposit taking institutions, non-ADI financial institutions, and insurers and funds managers (Boulton, Smart & Zutter, 2010). The authorized deposit taking financial institutions include banks, building societies and credit unions (Boulton, Smart & Zutter, 2010). The banks provide numerous financial services, which includes deposit taking and creating subsidiaries to manage functions such as insurance services and funds management. The building societies provide loans and take deposits from households. The credit unions provide payment services, housing/personal loan, and deposit to members (Agarwal, Liu & Rhee, 2008). NON-IDI financial institutions, include the money market corporate, operates in the wholesale markets in which it borrows and lends to government agencies and large corporations. Other services that institutions provide include investment management, foreign exchange, capital markets, and advisory (Agarwal, Liu & Rhee, 2008). Finance companies target the small and medium business and also households (Chowdhury & Chowdhury, 2010). These companies receive finances from the wholesale market through instruments such as unsecured notes and debentures. Securitisers also provides special purpose vehicles in which assets are brought together to accomplish a specified expectation. In addition, fund managers and insurers also contribute to the accomplishment of financial services (Boulton, Smart & Zutter, 2010). Numerous types exist include life insurance companies, general insurance companies, superannuation and approved deposit funds, public unit trust, cash management trusts, common funds and friendly societies (Pollock, Rindova & Maggitti, 2008). These institutions seek funds from the public and utilize the funds to manage the requirements of the contributors (Agarwal, Liu & Rhee, 2008). For example, the friendly societies allow the members to contribute resulting in the provision of numerous benefits. The benefits may include products targeting sickness, accident, funeral, education bonds or event investment products. (B). Identify and describe the main classes of financial instruments that are issued to the financial system. Financial instruments are agreements between entities in which one entity pay money or other valuable component or promises to pay certain amounts based on predetermined conditions (Adjasi, Osei & Fiawoyife, 2011). In addition, it enables counterparty in exchange for interest payment for indemnification against risk or acquisition of rights (Boulton, Smart & Zutter, 2010). The counterparty aims to receive indemnification for a loss event, premiums, capital gains, and receiving interests (Chowdhury & Chowdhury, 2010). The financial instruments are either electronic in nature of actual document; for example, a check. One of the common instruments is checks. The payer authorizes another entity to give certain benefits to the payee (Agarwal, Liu & Rhee, 2008). Stocks are another instrument in which companies’ uses to raise additional funds to support the requirements and objectives of an organization. The investors use stock to own a share of the company (Pollock, Rindova & Maggitti, 2008). Bonds are also used as a financial instrument in which investors lends some money for a specified period enabling the investor to earn interest (Chowdhury & Chowdhury, 2010). Traders may also use financial instruments to speculate about financial measurement, interest rates, index levels, future process and to hedge financial risk. The individuals employing these strategies are hedgers and speculators (Agarwal, Liu & Rhee, 2008). The speculations aim to predict the future prices and utilize the financial instruments to generate some revenues (Boulton, Smart & Zutter, 2010). Hedgers aim to mitigate financial challenges and transfer the problem or challenge to the speculators (Adjasi, Osei & Fiawoyife, 2011). These different entities employ different forms of financial instruments in accomplishing their respective goals and objectives. (C). Distinguish and discuss the differences between retail and wholesale markets, and money and capital markets. The retail and wholesale financial markets target different customers and also receive funds from different segments of the market (Pollock, Rindova & Maggitti, 2008). The retail financial markets provide services, which include credit facilities, savings, and transactional banking to small business and individuals (Adjasi, Osei & Fiawoyife, 2011). On the other hand, wholesale financial markets provide services to the larger entities, which includes investors, governments, financial institutions, public sector organizations and corporate (Agarwal, Liu & Rhee, 2008). Through the wholesale financial markets, governments and market companies are able to acquire products or raise fiancé that assists in reducing the risk of accomplishing business activities (Chowdhury & Chowdhury, 2010). In addition, the wholesale financial markets provide opportunities for individuals to participate in markets, such as commodities and cash, debt and equity (Boulton, Smart & Zutter, 2010). The retail financial market benefits from the roles and responsibilities of wholesale financial markets. The wholesale financial market funds the operations and requirements of the retail financial market. The retail financial market provides daily services to the customers through accepting deposits, processing loans and normal services that targeted individuals. It benefits through the minimal transactions in which the risks are high, and the customer is charged more to address the differences (Agarwal, Liu & Rhee, 2008). On the other hand, the wholesale market operates in more stable environment because the financial institutions prefer to loan governments and large companies rather than individuals because of financial risks associated with the entire process. Financial markets integrate the requirements and expectations of the sellers and the buyers through trading in financial assets, such as currencies, derivatives, commodities bonds and stocks (Pollock, Rindova & Maggitti, 2008). The role of finical market is to transfer risk and liquidity, raise capital and set prices for global trade. The two common markets used to accomplish these activities are the capital markets and money markets. The money market is frequently used for the short term basis: less than one year (Adjasi, Osei & Fiawoyife, 2011). The capital markets play a crucial role in the long-term maturity period. The capital market includes bond and stock market while the money market includes checks and cash in financial institutions. Question 2 (A). Discuss the primary roles and functions of an efficient and well-organized stock exchange such as the ASX A well-organized stock exchange is where traders and stock brokers can sell or buy stocks, bonds and other forms of securities (Pollock, Rindova & Maggitti, 2008). The stock exchange also provides numerous financial instruments and capital market requirements to support the requirements of the investor (Adjasi, Osei & Fiawoyife, 2011). A stock exchange provides an environment and conditions for ready and continuous market for sale and purchase of securities. It provides a ready platform to engage in selling and buying of financial instruments (Agarwal, Liu & Rhee, 2008). Stock exchange also evaluates securities to determine whether the investors would gain from investing and determining whether the price list reflects the operations of the company (Boulton, Smart & Zutter, 2010). Moreover, it enables and encourages capital formation. Stock exchange has the resources and capacities to encourage capital formation resulting in profitable investment (Valdez & Molyneux, 2010). Therefore, it acts as an object of capital formation. Stock exchange provides security and safety in dealings (Pollock, Rindova & Maggitti, 2008). Stock exchange operates in a long-term market, and the transactions are premised on regulations and rules. The stock exchange management enables the members to understand the nature of the market and prevent complications such as fraudulent activities (Agarwal, Liu & Rhee, 2008). Therefore, stock exchange acts as custodian of funds of investors because of the numerous regulations and rules (Adjasi, Osei & Fiawoyife, 2011). Furthermore, the stock exchange regulates company management through ensuring the listed companies adhere to the rules and regulations associated with the investments (Boulton, Smart & Zutter, 2010). Hence, the stock exchange ensures that the long-term investments are protected through the presence of numerous rules and regulations. It ensures the investors capital and related benefits are protected and provision of platform to mediate conflicts and misunderstanding including taking legal directives. (B). Describe the listing and flotation (IPO) of a business on a stock exchange such as the ASX. Initial public offering or flotation is when a company decides to offer its share on the stock exchange. Numerous processes play an important role in the entire procedure of engaging different stakeholders until the completion of the processes (Boulton, Smart & Zutter, 2010). The starting point is the planning phase in which the management of the organization decides to sell shares and seeks assistance from other entities such as investment banks and marketers. The company then publishes a prospectus that contains expected profits, financial position, the management and the business (Agarwal, Liu & Rhee, 2008). These processes have to conform to predetermined steps and procedures as indicated in the stock exchange requirements (Pollock, Rindova & Maggitti, 2008). The prospectus also contains the price of share, the use of the proceeds and official invites the investors (Chowdhury & Chowdhury, 2010). Through the entire process, the company continuously engages with the stock exchange management to make the process effective. A given period of time is provided in which the investors would acquire the shares (Boulton, Smart & Zutter, 2010). After the closing of the share sale, the entire process is reviewed, and the shares are reflected on the stock exchange. Secondary customers would then be allowed to trade on the floor of the stock exchange. In addition, the stock exchange will then continue monitoring to ensure the newly public company adheres to the rules and regulations in place. (C). Discuss the equity funding alternatives available to newly listed firms, and some of the equity funding alternatives that are available to establish listed firms. Newly listed firms require funding and numerous equity funding alternatives exist (Pollock, Rindova & Maggitti, 2008). Retained earnings are one of the strategies, which can be used to raise additional funds for a new or established listed firm. The dividends and interests are not given to the investors but used to generate additional income for the company (Agarwal, Liu & Rhee, 2008). Therefore, a listed company may use the funds to support company’s objectives and goals rather than giving to the investors. Another strategy is the conversion of debt into ownership of shares. For example, a debt can be converted into a given number of shares (Adjasi, Osei & Fiawoyife, 2011). Such a process ensures that the company will not need to pay the debt directly (Boulton, Smart & Zutter, 2010). The money aimed to pay the debt is then converted into doing other important obligations of the company. The company may also take a bond to bridge the financial requirements (Valdez & Molyneux, 2010). (D). Describe the bond market and the structure and issue of debentures. The bond market includes corporate debt securities and government issued securities and creates an environment that enables transfer of capital between different entities. It is among the strategies in which institutions seek to collect funds to support ongoing operations, business expansions, and government projects (Agarwal, Liu & Rhee, 2008). The bond market is made of primary market and the secondary market (Pollock, Rindova & Maggitti, 2008). The primary market enables the borrowers to sell debt securities to the lenders. The secondary market provides an environment in which investors can sell and buy previously issued securities. The bond market targets both the private and public companies. A debenture can be compared with a loan certificate on loan bond that indicates a company is liable to pay a certain amount with interest, and the loan is included in the company’s capital structure. However, a debenture cannot be traded like a share capital (Agarwal, Liu & Rhee, 2008). Debentures come in different forms and paid differently; for example, the senior debentures are given preferable treatment compared to other forms of debentures (Valdez & Molyneux, 2010). The debentures can be transferred easily by the debenture holder, but the holders have not right in the decision making of the company (Boulton, Smart & Zutter, 2010). The debenture holder is not allowed to participate in shareholder meetings, and interest is usually paid on the debentures and charged against the profit. The debentures are issued as a form of financial instrument to collect funds to support the requirements and obligations of a company (Pollock, Rindova & Maggitti, 2008). A given percentage of interest is indicated on the debenture in which the debenture holder will continue accessing interest even if the company does not generate any income. References Adjasi, C. K., Osei, K. A., & Fiawoyife, E. U. (2011). Explaining underpricing of IPOs in frontier markets: Evidence from the Nigeria Stock Exchange. Research in International Business and Finance, 25(3), 255-265. Agarwal, S., Liu, C., & Rhee, S. G. (2008). Investor demand for IPOs and aftermarket performance: Evidence from the Hong Kong stock market. Journal of International Financial Markets, Institutions and Money, 18(2), 176-190. Boulton, T. J., Smart, S. B., & Zutter, C. J. (2010). IPO underpricing and international corporate governance. Journal of International Business Studies, 41(2), 206-222. Chowdhury, A., & Chowdhury, S. P. (2010). Impact of capital structure on firm’s value: Evidence from Bangladesh. Business and Economic Horizons, (03), 111-122. Pollock, T. G., Rindova, V. P., & Maggitti, P. G. (2008). Market watch: Information and availability cascades among the media and investors in the US IPO market. Academy of Management Journal, 51(2), 335-358. Valdez, S., & Molyneux, P. (2010). An introduction to global financial markets. London: Palgrave Macmillan. Read More