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Trang 19TH EDITION
Financial Institutions Instruments
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KEY FEATURES
systems, including discussion on ethics and the global financial crisis
understand the global nature of financial institutions through real-world cases
bridging the gap between theory and application
and extended learning sections that provide additional resources for self-assessment and study
Now in its ninth edition, Financial Institutions, Instruments and Markets continues
to be one of the market leaders in financial institutions management With a
well-respected author team at the helm, it is a comprehensive resource for all students
wanting to learn about the modern financial system, as well as those preparing for
a career in finance.
This new edition, while maintaining its accessible approach and style, encourages
students to understand, anticipate and challenge the complex and global nature
of finance today.
Trang 2ABS Australian Bureau of Statistics
ACCC Australian Competition and Consumer Commission
ADI Authorised deposit-taking institution
ADR American depositary receipt
AFMA Australian Financial Markets Association
AFR Australian Financial Review
AGPS Australian Government Printing Service
AOFM Australian Office of Financial Management
APRA Australian Prudential Regulation Authority
ARBL Assets repriced before liabilities
ASIC Australian Securities and Investments Commission
ASX Australian Securities Exchange
ATM Automatic teller machine
AWOTE Average weekly ordinary time earnings
BAB Bank accepted bill
BBSW Bank bill swap rate
BIS Bank for International Settlements
CAR Capital adequacy requirement
CBA Commonwealth Bank of Australia
CBOT Chicago Board of Trade
CD Certificate of deposit
CDI CHESS depositary interest
CDS Credit default swap
CEDEL Centrale de Livraison des Valeurs Mobilières
CEO Chief executive officer
CGS Commonwealth Government Securities
CHESS ASX Clearing House Electronic Sub-register System
CLICK XT/ITS ASX securities electronic trading system
CME Chicago Mercantile Exchange
CMT Cash management trust
CPI Consumer price index
CRA Credit rating agency
CUFS CHESS Units of Foreign Securities
EBIT Earnings before interest and tax
ECP Eurocommercial paper
EDI Electronic data interchange
EDR Euro depositary receipt
EFIC Export Finance and Insurance Corporation
EFTPOS Electronic funds transfer at point of sale
EMU European Monetary Union
EPS Earnings per share
ERM Exchange rate mechanism (European Union)
ESA Exchange settlement account
ETP Eligible termination payment
FDA Fully drawn advance
FEC Forward exchange contract
Fed Federal Reserve Bank (USA)
FRA Forward rate agreement
FRN Floating rate note
FTSE Financial Times Stock Exchange
G-10 Group of ten central banks
GDP Gross domestic product
GDR Global depositary receipt
GICS Global industry classification standard
GNE Gross national expenditure
HPY Holding period yield
IBSA International Banks and Securities Association
IMF International Monetary Fund
IPO Initial public offering
IRR Internal rate of return
IWT Interest withholding tax
L/C Letter of credit
LEPO Low exercise price option
LIBID London interbank bid rate LIBOR London interbank offered rate LIFFE London International Financial Futures Exchange LIMEAN London interbank mean rate
LME London Metals Exchange LSE London Stock Exchange M&A Merger and acquisition
MSCI Morgan Stanley Capital International index
NAB National Australia Bank NASDAQ National Association of Securities Dealers Automated
Quotation System NBFI Non-bank financial institution NCD Negotiable certificate of deposit NGF National Guarantee Fund NIC Newly industrialising country NIF Euronote issuance facility NPV Net present value NTA Net tangible assets NYSE New York Stock Exchange OBS Off-balance sheet OBU Offshore banking unit OECD Organisation for Economic Cooperation and Development OPEC Organization of Petroleum Exporting Countries
OTC Over-the-counter P/E Price to earnings ratio PLC Publicly listed corporation P-note Promissory note PPP Purchasing power parity PSBR Public sector borrowing requirement
PVCF Present value of cash flows QIB Qualified institutional buyers RBA Reserve Bank of Australia RBL Reasonable benefit limit RBNZ Reserve Bank of New Zealand repos Repurchase agreements RITS Reserve Bank Information and Transfer System ROE Return on equity
ROI Return on investment RTGS Real-time gross settlement S&P Standard and Poor’s Credit Rating Agency SEC Securities and Exchange Commission (USA) SFE Sydney Futures Exchange
SGC Superannuation guarantee charge SIBOR Singapore interbank offered rate SIS Superannuation Industry (Supervision) Act SMART Specific, measurable, achievable, realistic, timely SME Small- and medium-sized enterprise
SOMA Surveillance of Market Activity system (ASX) SPAN Standard portfolio analysis of risk SPI hare price index
SPV Special-purpose vehicle SSP Special service provider SWIFT Society for Worldwide Interbank Financial
Telecommunications T-bill Treasury bill TLC Transferable loan certificate T-note Treasury note
USA United States of America USCP United States commercial paper USSR Union of Soviet Socialist Republics VaR Value at risk
WBC Westpac Banking Corporation
RMB China, People’s Republic of Chinese renminbi (yuan)
• CNY (traded on-shore)
• CNH (traded off-shore)
EUR European monetary union Euro
UAE United Arab Emirates Emirati dirham
USD United States of America US dollar
Trang 3ABS Australian Bureau of Statistics
ACCC Australian Competition and Consumer Commission
ADI Authorised deposit-taking institution
ADR American depositary receipt
AFMA Australian Financial Markets Association
AFR Australian Financial Review
AGPS Australian Government Printing Service
AOFM Australian Office of Financial Management
APRA Australian Prudential Regulation Authority
ARBL Assets repriced before liabilities
ASIC Australian Securities and Investments Commission
ASX Australian Securities Exchange
ATM Automatic teller machine
AWOTE Average weekly ordinary time earnings
BAB Bank accepted bill
BBSW Bank bill swap rate
BIS Bank for International Settlements
CAR Capital adequacy requirement
CBA Commonwealth Bank of Australia
CBOT Chicago Board of Trade
CD Certificate of deposit
CDI CHESS depositary interest
CDS Credit default swap
CEDEL Centrale de Livraison des Valeurs Mobilières
CEO Chief executive officer
CGS Commonwealth Government Securities
CHESS ASX Clearing House Electronic Sub-register System
CLICK XT/ITS ASX securities electronic trading system
CME Chicago Mercantile Exchange
CMT Cash management trust
CPI Consumer price index
CRA Credit rating agency
CUFS CHESS Units of Foreign Securities
EBIT Earnings before interest and tax
ECP Eurocommercial paper
EDI Electronic data interchange
EDR Euro depositary receipt
EFIC Export Finance and Insurance Corporation
EFTPOS Electronic funds transfer at point of sale
EMU European Monetary Union
EPS Earnings per share
ERM Exchange rate mechanism (European Union)
ESA Exchange settlement account
ETP Eligible termination payment
FDA Fully drawn advance
FEC Forward exchange contract
Fed Federal Reserve Bank (USA)
FRA Forward rate agreement
FRN Floating rate note
FTSE Financial Times Stock Exchange
G-10 Group of ten central banks
GDP Gross domestic product
GDR Global depositary receipt
GICS Global industry classification standard
GNE Gross national expenditure
HPY Holding period yield
IBSA International Banks and Securities Association
IMF International Monetary Fund
IPO Initial public offering
IRR Internal rate of return
IWT Interest withholding tax
L/C Letter of credit
LEPO Low exercise price option
LIBID London interbank bid rate LIBOR London interbank offered rate LIFFE London International Financial Futures Exchange LIMEAN London interbank mean rate
LME London Metals Exchange LSE London Stock Exchange M&A Merger and acquisition
MSCI Morgan Stanley Capital International index
NAB National Australia Bank NASDAQ National Association of Securities Dealers Automated
Quotation System NBFI Non-bank financial institution NCD Negotiable certificate of deposit NGF National Guarantee Fund NIC Newly industrialising country NIF Euronote issuance facility NPV Net present value NTA Net tangible assets NYSE New York Stock Exchange OBS Off-balance sheet OBU Offshore banking unit OECD Organisation for Economic Cooperation and Development OPEC Organization of Petroleum Exporting Countries
OTC Over-the-counter P/E Price to earnings ratio PLC Publicly listed corporation P-note Promissory note PPP Purchasing power parity PSBR Public sector borrowing requirement
PVCF Present value of cash flows QIB Qualified institutional buyers RBA Reserve Bank of Australia RBL Reasonable benefit limit RBNZ Reserve Bank of New Zealand repos Repurchase agreements RITS Reserve Bank Information and Transfer System ROE Return on equity
ROI Return on investment RTGS Real-time gross settlement S&P Standard and Poor’s Credit Rating Agency SEC Securities and Exchange Commission (USA) SFE Sydney Futures Exchange
SGC Superannuation guarantee charge SIBOR Singapore interbank offered rate SIS Superannuation Industry (Supervision) Act SMART Specific, measurable, achievable, realistic, timely SME Small- and medium-sized enterprise
SOMA Surveillance of Market Activity system (ASX) SPAN Standard portfolio analysis of risk SPI hare price index
SPV Special-purpose vehicle SSP Special service provider SWIFT Society for Worldwide Interbank Financial
Telecommunications T-bill Treasury bill TLC Transferable loan certificate T-note Treasury note
USA United States of America USCP United States commercial paper USSR Union of Soviet Socialist Republics VaR Value at risk
WBC Westpac Banking Corporation
RMB China, People’s Republic of Chinese renminbi (yuan)
• CNY (traded on-shore)
• CNH (traded off-shore)
EUR European monetary union Euro
UAE United Arab Emirates Emirati dirham
USD United States of America US dollar
Trang 4Financial Institutions Instruments
Trang 51 DEST 2002, Employability skills for the future, Department of Education, Science and Training, Commonwealth of Australia, www.employmentdirections.net.au/docs/employabilityframework.doc.
2 AACSB International 2008, Eligibility procedures and accreditation standards for business accreditation, www.aacsb.edu.
ASSURANCE OF LEARNING
Many educational institutions today are focused on the notion of assurance of learning, an important element of some
accreditationstandards.ThisnintheditionofFinancial Institutions, Instruments and Marketsisspecificallycreatedtosupport
assuranceoflearninginitiativesdesignedtodrawonandexpandkeyknowledgeandskillsetsrequiredbygraduatessuchas:
communication, initiative and enterprise, self-management, life-long learning, problem solving, technology, teamwork, planning and organising.1
Chapterlearningobjectivesandpedagogicalfeaturesthroughoutthetextaredevelopedtodirectlyrelatetothelearningoutcomesforyourcoursewhichmayassistinstructorsinmakingthecollectionandpresentationofassuranceoflearningdataeasier
AACSB STATEMENT
McGraw-HillEducationisaproudcorporatememberofAACSBInternational.Understandingtheimportanceandvalueof
AACSBaccreditation,Financial Institutions, Instruments and Markets9ehassoughttorecognisethecurriculumguidelines
detailedintheAACSBstandardsforbusinessaccreditation.Avarietyofpedagogicalfeaturesinchaptersaredesignedto
drawonthegeneralknowledgeandskillguidelinesfoundintheAACSBstandards:communication abilities, use of information
technology, ethical understanding, reflective thinking, critical analysis and diversity and multicultural understanding.2
TheAACSBleavescontentcoverageandassessmentwithinthepurviewofindividualschools,themissionoftheschool
andthefaculty.WhileFinancial Institutions, Instruments and Markets9eandtheteachingpackagemakenoclaimofspecific
AACSBqualificationorevaluation,wehavegearedpedagogicalfeaturesandonlineassessmenttoolstowardssomeofthegeneralknowledgeandskillsareas
www.freebookslides.com
Trang 69TH EDITION
Financial Institutions Instruments
CHRISTOPHER VINEY
PETER PHILLIPS
Trang 7Copyright © 2019 McGraw-Hill Education (Australia) Pty Ltd
Additionalownersofcopyrightareacknowledgedinon-pagecredits.
Everyefforthasbeenmadetotraceandacknowledgecopyrightedmaterial.Theauthorsandpublisherstendertheir
apologiesshouldanyinfringementhaveoccurred.
Reproduction and communication for educational purposes
TheAustralianCopyright Act 1968(theAct)allowsamaximumofonechapteror10%ofthepagesofthiswork,
McGraw-Hill Education (Australia) Pty Ltd
Level 33, 680 George Street, Sydney NSW 2000
Trang 8B RIEF CONTENTS
PART 1 FINANCIAL INSTITUTIONS 1
Chapter 1 A modern financial system: an overview 3
Chapter 2 Commercial banks 41
Chapter 3 Non-bank financial institutions 87
PART 2 EQUITY MARKETS 129
Chapter 4 The share market and the corporation 132
Chapter 5 Corporations issuing equity in the share market 161
Chapter 6 Investors in the share market 191
Chapter 7 Forecasting share price movements 222
PART 3 THE CORPORATE DEBT MARKET 257
Chapter 8 Mathematics of finance: an introduction to basic concepts and calculations 259
Chapter 9 Short-term debt 287
Chapter 10 Medium- to long-term debt 315
Chapter 11 International debt markets 347
PART 4 GOVERNMENT DEBT, MONETARY POLICY, THE PAYMENTS SYSTEM AND INTEREST RATES 385
Chapter 12 Government debt, monetary policy and the payments system 388
Chapter 13 An introduction to interest rate determination and forecasting 417
Chapter 14 Interest rate risk measurement 453
PART 5 THE FOREIGN EXCHANGE MARKET 483
Chapter 15 Foreign exchange: the structure and operation of the FX market 485
Chapter 16 Foreign exchange: factors that influence the exchange rate 513
Chapter 17 Foreign exchange: risk identification and management 538
PART 6 DERIVATIVE MARKETS AND RISK MANAGEMENT 563
Chapter 18 An introduction to risk management and derivatives 565
Chapter 19 Futures contracts and forward rate agreements 594
Chapter 20 Options 626
Chapter 21 Interest rate swaps, cross-currency swaps and credit default swaps 663
Trang 9Preface �������������������������������������������������������������������������������� xx
About the authors ������������������������������������������������������������ xxi
Acknowledgments ������������������������������������������������������������ xxi
Highlights of the ninth edition ��������������������������������������� xxii
Text at a glance ��������������������������������������������������������������� xxv Connect �������������������������������������������������������������������������� xxviii Exploring finance on the web ���������������������������������������� xxx Careers in finance ��������������������������������������������������������� xxxii
1.1 Theory and facts in finance 4
1.2 The financial system and financial institutions 6
1.3 Financial instruments 11
1.3.1 Equity 11
1.3.2 Debt 12
1.3.3 Derivatives 12
1.4 Financial markets 13
1.4.1 Matching principle 14
1.4.2 Primary and secondary market transactions 14
1.4.3 Direct finance and intermediated finance 16
1.4.4 Wholesale and retail markets 20
1.4.5 Money markets 20
1.4.6 Capital markets 24
1.5 Flow of funds, market relationships and stability 27
Case study: The next global financial crisis? 28
Master before you move on 30
Extended learning A: The global financial crisis of 2008 32
Extended learning B: The impact of the Asian financial crisis on the financial system 35
Questions 38
Key terms 39
CHAPTER 2 COMMERCIAL BANKS 41 2.1 The main activities of commercial banking 43
2.2 Sources of funds 44
2.2.1 Current account deposits 44
2.2.2 Call or demand deposits 45
2.2.3 Term deposits 45
2.2.4 Negotiable certificates of deposit 45
2.2.5 Bill acceptance liabilities 46
2.2.6 Debt liabilities 46
2.2.7 Foreign currency liabilities 47
2.2.8 Loan capital and shareholders’ equity 47
Trang 102.3.1 Personal and housing finance 48
2.3.2 Commercial lending 50
2.3.3 Lending to government 51
2.3.4 Other bank assets 51
2.4 Off-balance-sheet business 52
2.4.1 Direct credit substitutes 53
2.4.2 Trade- and performance-related items 53
2.4.3 Commitments 53
2.4.4 Foreign exchange contracts, interest rate contracts and other market-rate-related contracts 54
2.4.5 Volume of off-balance-sheet business 54
2.5 Regulation and prudential supervision of commercial banks 56
2.6 A background to the capital adequacy standards 57
2.7 The Basel accords: evolution from Basel I to Basel III 59
2.7.1 Minimum capital adequacy requirement 59
2.7.2 The definition of capital 60
2.7.3 Basel III structural framework 60
2.7.4 Basel III and bank liquidity 67
2.8 Liquidity management and other supervisory controls 69
2.8.1 Other regulatory and supervisory controls 70
Case study: Basel III reforms 71
Summary 72
Extended learning A: The standardised approach to credit risk 74
Extended learning B: Business continuity risk management 77
Extended learning C: Corporate governance and ethics 82
Questions 84
Key terms 85
CHAPTER 3 NON-BANK FINANCIAL INSTITUTIONS 87 3.1 Investment banks 89
3.1.1 Sources of funds and uses of funds 89
3.1.2 Off-balance-sheet business 90
3.2 Managed funds 94
3.2.1 Structure of the managed funds sector 95
3.2.2 Sources and uses of funds 95
3.2.3 Capital guaranteed funds 97
3.2.4 Capital stable funds 97
3.2.5 Balanced growth funds 97
3.2.6 Managed growth or capital growth funds 97
Trang 113.3 Cash management trusts 98
3.4 Public unit trusts 99
3.5 Superannuation funds 101
3.5.1 Sources of funds 102
3.5.2 Defined benefit funds and accumulation funds 105
3.5.3 Regulation 106
3.6 Life insurance offices 107
3.6.1 Life insurance policies 108
3.7 General insurance offices 110
3.7.1 General insurance policies 110
3.8 Hedge funds 112
3.9 Finance companies and general financiers 113
3.9.1 Sources of funds and uses of funds 113
3.9.2 Sector structure 114
3.10 Building societies 115
3.11 Credit unions 116
3.12 Export finance corporations 116
Case study: The hedge fund sector 117
Master before you move on 119
Extended learning: Project finance and structured finance 121
Questions 125
Key terms 127
PART 2 EQUITY MARKETS 129 CHAPTER 4 THE SHARE MARKET AND THE CORPORATION 132 4.1 The nature of a corporation 134
4.1.1 Advantages of the corporate form of business organisation 135
4.1.2 Disadvantages of the corporate form of business organisation 135
4.2 The stock exchange 137
4.3 The primary market role of a stock exchange 138
4.4 The secondary market role of a stock exchange 140
4.5 The managed product and derivative product roles of a stock exchange 141
4.5.1 Exchange traded funds 142
4.5.2 Contracts for difference 143
4.5.3 Real estate investment trusts (REIT) 144
4.5.4 Infrastructure funds 144
4.5.5 Options 144
4.5.6 Warrants 145
4.5.7 Futures contracts 145
Trang 124.6 The interest rate market role of a stock exchange 146
4.7 The trading and settlement roles of a stock exchange 148
4.8 The information role of a stock exchange 150
4.9 The regulatory role of a stock exchange 152
4.10 The private equity market 153
Case study: Development of industrial scale blockchain in Australia 154
Master before you move on 155
Questions 159
Key terms 160
CHAPTER 5 CORPORATIONS ISSUING EQUITY IN THE SHARE MARKET 161 5.1 The investment decision: capital budgeting 163
5.1.1 Net present value 163
5.1.2 Internal rate of return 165
5.2 The financing decision: equity, debt and risk 166
5.2.1 Financial risk and the debt-to-equity ratio 167
5.2.2 What is the appropriate debt-to-equity ratio? 168
5.3 Initial public offering 169
5.3.1 Ordinary shares: limited liability companies 171
5.3.2 Ordinary shares: no liability companies 171
5.4 Listing a business on a stock exchange 172
5.5 Equity-funding alternatives for listed companies 174
5.5.1 Rights issue or share purchase plan 174
5.5.2 Placements 175
5.5.3 Takeover issues 176
5.5.4 Dividend reinvestment schemes 176
5.5.5 Preference shares 177
5.5.6 Convertible notes and other quasi-equity securities 178
Case study: Covenant-lite loans—risk implications 180
Master before you move on 181
Extended learning: Australian Securities Exchange (ASX) listing rule requirements 183
Questions 188
Key terms 190
CHAPTER 6 INVESTORS IN THE SHARE MARKET 191 6.1 Share-market investment 193
6.2 Buying and selling shares 196
6.3 Taxation 198
6.4 Financial performance indicators 201
6.4.1 Capital structure 201
6.4.2 Liquidity 201
Trang 136.4.3 Debt servicing 202
6.4.4 Profitability 203
6.4.5 Share price 203
6.4.6 Risk 205
6.5 Pricing of shares 206
6.5.1 Estimating the price of a share 207
6.5.2 Cum-dividend and ex-dividend share prices 208
6.5.3 Bonus share issues 209
6.5.4 Share splits 209
6.5.5 Pro-rata rights issues 210
6.6 Stock-market indices and published share information 211
Case study: Private equity firms, angel investors and exit strategies 215
Master before you move on 216
Questions 219
Key terms 221
CHAPTER 7 FORECASTING SHARE PRICE MOVEMENTS 222 7.1 Fundamental analysis: the top-down approach 224
7.1.1 International economies 225
7.1.2 The rate of growth of an economy 225
7.1.3 Exchange rates 226
7.1.4 Interest rates 227
7.1.5 The balance of payments current account 227
7.1.6 Inflationary pressures 228
7.1.7 Wages growth 229
7.1.8 Understanding the interrelationships of economic fundamentals 229
7.2 Fundamental analysis: the bottom-up approach 230
7.3 Technical analysis 232
7.3.1 Moving-averages models 232
7.3.2 Charting 235
7.4 Electronic trading 240
7.5 The random walk, efficient market and behavioural finance hypotheses 242
7.5.1 The random walk hypothesis 243
7.5.2 The efficient market hypothesis 243
7.5.3 The behavioural finance hypothesis 245
Case study: The effects of scandals on the market 249
Master before you move on 250
Questions 253
Key terms 255
Trang 14PART 3 THE CORPORATE DEBT MARKET 257
8.1 Simple interest 261
8.1.1 Simple interest accumulation 262
8.1.2 Present value with simple interest 263
8.1.3 Calculation of yields 266
8.1.4 Holding period yield 267
8.2 Compound interest 268
8.2.1 Compound interest accumulation (future value) 269
8.2.2 Present value with compound interest 271
8.2.3 Present value of an annuity 272
8.2.4 Accumulated value of an annuity (future value) 276
8.2.5 Effective rates of interest 277
Case study: The retirement dream 279
Master before you move on 280
Questions 283
Key terms 286
CHAPTER 9 SHORT-TERM DEBT 287 9.1 Trade credit 289
9.2 Bank overdrafts 290
9.3 Commercial bills 292
9.3.1 Features of commercial bills 292
9.3.2 The flow of funds and bill financing 294
9.3.3 Establishing a bill financing facility 295
9.3.4 Advantages of commercial bill financing 296
9.4 Calculations: discount securities 297
9.4.1 Calculating the price where the yield is known 297
9.4.2 Calculating the face value where the issue price and yield are known 299
9.4.3 Calculating the yield 299
9.4.4 Calculating the price where the discount rate is known 300
9.4.5 Calculating the discount rate 301
9.5 Promissory notes 302
9.5.1 Establishing a P-note issue program 303
9.5.2 Underwritten P-note issues 304
9.5.3 Non-underwritten issues 304
9.6 Negotiable certificates of deposit 305
Trang 159.7 Inventory finance, accounts receivable financing and factoring 306
9.7.1 Inventory finance 306
9.7.2 Accounts receivable financing and factoring 306
Case study: The demise of LIBOR? 308
Master before you move on 309
Questions 312
Key terms 314
CHAPTER 10 MEDIUM- TO LONG-TERM DEBT 315 10.1 Term loans or fully drawn advances 317
10.1.1 Term loan structures 317
10.1.2 Loan covenants 319
10.1.3 Calculating the instalment on a term loan 320
10.2 Mortgage finance 322
10.2.1 Calculating the instalment on a mortgage loan 323
10.2.2 Securitisation and mortgage finance 324
10.3 The bond market: debentures, unsecured notes and subordinated debt 325
10.3.1 Debentures and unsecured notes 327
10.3.2 Issuing debentures and notes 328
10.3.3 Subordinated debt 329
10.4 Calculations: fixed-interest securities 330
10.4.1 Bond price/yield relationship 330
10.4.2 Price of a fixed-interest bond at a coupon date 330
10.4.3 Price of a fixed-interest bond between coupon dates 332
10.5 Leasing 333
10.5.1 Types of leases 334
10.5.2 Lease structures 336
Case study: The Kangaroo bonds and blockchain bond-i’s 337
Master before you move on 338
Extended learning: Securitisation 341
Questions 344
Key terms 346
CHAPTER 11 INTERNATIONAL DEBT MARKETS 347 11.1 The euromarkets 349
11.2 Eurocurrency market 351
11.2.1 Short-term bank advances 352
11.2.2 Eurocurrency standby facilities 352
11.2.3 Medium- to long-term eurocurrency bank loans 353
11.3 Euronote market 354
11.3.1 Euronote issuance facility 354
Trang 1611.3.2 Eurocommercial paper 356
11.3.3 Calculating the price of an NIF and an ECP 356
11.4 Eurobond market 357
11.4.1 Euro medium-term notes 357
11.4.2 Eurobonds 358
11.4.3 Issue and trading of eurobonds 359
11.4.4 Types of eurobonds 361
11.4.5 Calculating the price of fixed-interest euromarket securities 362
11.5 Markets in the USA 364
11.5.1 Commercial paper 364
11.5.2 US foreign bonds (Yankee bonds) 365
11.5.3 American depositary receipts 366
11.6 Credit rating agencies 367
Case study: Supervision of rating agencies 371
Master before you move on 372
Extended learning A: Novation, subparticipation and transferable loan certificates 375
Extended learning B: Convertible bonds and warrants 376
Extended learning C: US medium-term notes 377
Extended learning D: Standard & Poor’s credit rating definitions 379
Questions 381
Key terms 383
PART 4 GOVERNMENT DEBT, MONETARY POLICY, THE PAYMENTS SYSTEM AND INTEREST RATES 385 CHAPTER 12 GOVERNMENT DEBT, MONETARY POLICY AND THE PAYMENTS SYSTEM 388 12.1 The Commonwealth Government borrowing requirement 390
12.1.1 The borrowing requirement: full financial year 390
12.1.2 The borrowing requirement: within the financial year 391
12.2 Commonwealth Government securities 392
12.2.1 Treasury bonds 392
12.2.2 Treasury notes 396
12.3 State government securities 399
12.4 Monetary policy 400
12.4.1 Open market operations 403
12.4.2 Impacts on financial system liquidity 404
12.5 The payments system 406
12.5.1 Exchange settlement accounts 407
12.5.2 Real-time gross settlement 408
12.5.3 Repurchase agreements (repos) 409
Case study: The new payments platform (NPP) in Australia and the risk of fraud 410
Master before you move on 411
Trang 17Extended learning: Fixed-coupon Treasury bonds: price calculation using the
Australian Office of Financial Management (AOFM) formula 413
Questions 414
Key terms 416
CHAPTER 13 AN INTRODUCTION TO INTEREST RATE DETERMINATION AND FORECASTING 417 13.1 The macroeconomic context of interest rate determination 419
13.2 The loanable funds approach to interest rate determination 423
13.2.1 The demand for loanable funds 425
13.2.2 The supply of loanable funds 426
13.2.3 Equilibrium in the loanable funds market 427
13.2.4 Loanable funds—an expected increase in the level of economic activity 428
13.2.5 Inflationary expectations in the loanable funds approach 429
13.3 The term structure of interest rates 431
13.3.1 The expectations theory 433
13.3.2 The segmented markets theory 435
13.3.3 The expectations approach versus the segmented markets approach 437
13.3.4 The liquidity premium theory 438
13.4 The risk structure of interest rates 441
Case study: The Reserve Bank’s balancing act 443
Master before you move on 445
Extended learning: The yield curve and expectations theory calculations 447
Questions 450
Key terms 452
CHAPTER 14 INTEREST RATE RISK MEASUREMENT 453 14.1 Interest rate risk 455
14.2 Exposure management systems 456
14.2.1 Forecasting 457
14.2.2 Strategies and techniques 457
14.2.3 Management reporting 458
14.3 Assets re-priced before liabilities principle 459
14.4 Pricing financial securities 460
14.4.1 Discount security pricing 460
14.4.2 Fixed-interest security pricing 461
14.5 Re-pricing gap analysis 462
14.6 Duration 464
14.7 Convexity 470
14.8 Interest rate risk management techniques 473
14.8.1 Internal techniques 474
14.8.2 External techniques 475
Trang 18Case study: APRA and bear as risk management regimes in Australia 476
Master before you move on 477
Questions 480
Key terms 482
PART 5 THE FOREIGN EXCHANGE MARKET 483 CHAPTER 15 FOREIGN EXCHANGE: THE STRUCTURE AND OPERATION OF THE FX MARKET 485 15.1 Exchange rate regimes 487
15.2 Foreign exchange market participants 488
15.2.1 Foreign exchange dealers and brokers 489
15.2.2 Central banks 489
15.2.3 Firms conducting international trade transactions 489
15.2.4 Investors and borrowers in the international money markets and capital markets 490
15.2.5 Speculative transactions 490
15.2.6 Arbitrage transactions 491
15.3 The operation of the FX market 492
15.4 Spot and forward transactions 493
15.5 Spot market quotations 494
15.5.1 Asking for a quotation 494
15.5.2 Two-way quotations 495
15.5.3 Transposing spot quotations 497
15.5.4 Calculating cross-rates 497
15.6 Forward market quotations 500
15.6.1 Forward points and forward exchange contracts 500
15.6.2 Some real-world complications 502
15.7 Economic and Monetary Union of the EU and the FX markets 505
Case study: Fixed exchange rates and currency misalignments 506
Master before you move on 507
Questions 510
Key terms 511
CHAPTER 16 FOREIGN EXCHANGE: FACTORS THAT INFLUENCE THE EXCHANGE RATE 513 16.1 The FX markets and an equilibrium exchange rate 515
16.1.1 Demand for a currency 515
16.1.2 Supply of a currency 515
16.1.3 Equilibrium exchange rate 517
16.2 Factors that influence exchange rate movements 518
16.2.1 Relative inflation rates 518
16.2.2 Relative national income growth rates 520
Trang 1916.2.3 Relative interest rates 521
16.2.4 Exchange rate expectations 524
16.2.5 Central bank or government intervention 525
16.3 Measuring exchange rate sensitivity to changes in economic variables 528
Case study: Terrorist attacks and FX movements 530
Master before you move on 531
Extended learning: Purchasing power parity 533
Questions 536
Key terms 537
CHAPTER 17 FOREIGN EXCHANGE: RISK IDENTIFICATION AND MANAGEMENT 538 17.1 Foreign exchange risk policy formulation 540
17.1.1 Foreign exchange objectives 541
17.1.2 Management structure 541
17.1.3 Authorisations 542
17.1.4 Exposure reporting systems 543
17.1.5 Communications 543
17.1.6 Performance evaluation 543
17.1.7 Audit and review procedures 544
17.2 Measuring transaction exposure 545
17.2.1 Net cash flows 546
17.2.2 Transaction exposures: currency variability 548
17.2.3 Transaction exposures: currency correlations 549
17.3 Risk management: market-based hedging techniques 551
17.3.1 Forward exchange contracts 551
17.3.2 Money-market hedge to cover FX risk 553
17.4 Risk management: internal hedging techniques 555
17.4.1 Invoicing in the home currency 555
17.4.2 Creating a natural hedge 555
17.4.3 Currency diversification 556
17.4.4 Leading and lagging FX transactions 556
17.4.5 Mark-ups 557
17.4.6 Counter-trade and currency offsets 557
Case study: FX risk management: Do companies hedge or speculate? 558
Master before you move on 559
Questions 561
Key terms 562
Trang 20PART 6 DERIVATIVE MARKETS AND RISK MANAGEMENT 563
18.1 Understanding risk 567
18.1.1 Operational risks 567
18.1.2 Financial risks 568
18.2 The risk management process 570
18.2.1 Identify operational and financial risk exposures 570
18.2.2 Analyse the impact of the risk exposures 571
18.2.3 Assess the attitude of the organisation to each identified risk exposure 571
18.2.4 Select appropriate risk management strategies and products 572
18.2.5 Establish related risk and product controls 572
18.2.6 Implement the risk management strategy 572
18.2.7 Monitor, report, review and audit 573
18.3 Futures contracts 574
18.4 Forward contracts 576
18.4.1 Forward rate agreements 576
18.4.2 Forward foreign exchange contracts 578
18.5 Option contracts 579
18.5.1 Call option profit and loss payoff profiles 580
18.5.2 Put option profit and loss payoff profiles 581
18.6 Swap contracts 582
18.6.1 Interest rate swaps 583
18.6.2 Cross-currency swaps 584
Case study: Regulatory reforms and the ‘clearing’ of derivatives 586
Master before you move on 588
Questions 590
Key terms 593
CHAPTER 19 FUTURES CONTRACTS AND FORWARD RATE AGREEMENTS 594 19.1 Hedging using futures contracts 596
19.2 Main features of a futures transaction 597
19.2.1 Orders and agreement to trade 598
19.2.2 Margin requirements 599
19.2.3 Closing out of a contract 600
19.2.4 Contract delivery 600
19.3 Futures market instruments 601
Trang 2119.4 Futures market participants 603
19.4.1 Hedgers 603
19.4.2 Speculators 603
19.4.3 Traders 604
19.4.4 Arbitrageurs 604
19.5 Hedging: risk management using futures 605
19.5.1 Hedging the cost of funds (borrowing hedge) 605
19.5.2 Hedging the yield on funds (investment hedge) 607
19.5.3 Hedging a foreign currency transaction 608
19.5.4 Hedging the value of a share portfolio 609
19.5.5 Hedging against volatility 610
19.6 Risks in using futures contracts for hedging 612
19.6.1 Standard contract size 612
19.6.2 Margin payments 613
19.6.3 Basis risk 614
19.6.4 Cross-commodity hedging 614
19.7 Forward rate agreements 615
19.7.1 Using an FRA for a borrowing hedge 617
Case study: SPI futures market acts as a market-maker facilitating price discovery in the S&P/ASX 200 Index 619
Master before you move on 620
Questions 623
Key terms 625
CHAPTER 20 OPTIONS 626 20.1 The nature of options 628
20.2 Option profit and loss payoff profiles 629
20.2.1 Call option profit and loss payoff profiles 629
20.2.2 Put option profit and loss payoff profiles 632
20.2.3 Covered and naked options 634
20.3 The organisation of the market 636
20.3.1 International options markets 636
20.3.2 The Australian options markets 637
20.4 Factors affecting an option contract premium 641
20.4.1 Intrinsic value 641
20.4.2 Time value 642
20.4.3 Price volatility 642
20.4.4 Interest rate levels 644
20.4.5 Cap, floor and collar: an options cost-minimisation strategy 644
20.5 Option risk management strategies 645
20.5.1 Single-option strategies 645
20.5.2 Combined-options strategies 648
Trang 22Case study: The Black–Scholes option pricing model: The equation that can end
the world? 657Master before you move on 659Questions 661Key terms 662
21.1 Interest rate swaps 666
21.2 Rationale for the existence of interest rate swaps 670
21.2.1 Lowering the net cost of funds (comparative advantage) 67021.2.2 Gaining access to otherwise inaccessible debt markets 67121.2.3 Hedging interest rate risk exposures 67121.2.4 Lock in profit margins on business transactions 672
21.3 Cross-currency swaps 673
21.4 Rationale for the existence of currency swaps 676
21.5 Credit default swaps 678
21.6 Credit and settlements risk associated with swaps 681
Master before you move on 684Questions 687Key terms 690
Glossary � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 691 Index � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 712
Trang 23P REFACE
This book has achieved remarkable acceptance by academics and their students in a significant number of tertiary institutions throughout Australia, New Zealand and Asia, and by professionals within the financial services industry In this ninth edition, we present once more a finance text for you that is authoritative and scholarly, and which at the same time highlights the dynamic, exciting and global nature of financial institutions, instruments and markets
As the global financial crisis and its aftermath fades into history, attention has turned to the financial services industry itself, its culture and its values In 2018, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia highlighted many areas of concern and highlighted the importance of strong governance, codes of conduct and ethics within financial services firms The findings of the Royal Commission will continue to shape public opinion and trust in financial institutions for many years to come New graduates in finance, as well as their professors, are not powerless to ensure that this trust is restored sooner rather than later
As the ninth edition was being finalised, financial markets in the United States were tentatively testing and retreating from new highs against a backdrop of stronger economic activity and rising interest rates In Australia, the challenge
of returning interest rates to more ‘normal’ levels without causing a major disruption to the housing market remained perhaps the most significant challenge confronting the Reserve Bank of Australia
Although political uncertainty has swept through Europe and the United States, it is important to recognise that innovation, technological and otherwise, continues at pace New companies with new products and new ideas are forever emerging and will seek capital from the world’s debt and equity markets to fund their first (or next) steps In the financial markets, as for most aspects of life, we can never wait for the clouds of uncertainty to lift before trying to make our way
One thing is certain, change will occur As students of the financial system you must keep yourself informed about the structure and operation of financial institutions, instruments and markets Importantly, you must think about and anticipate future directions and change Despite the continuous change that financial markets undergo, there are a set of stable, underlying principles that govern decision-making across all markets and instruments It is worth keeping in mind, then, that a sound knowledge of the basics can take you much further than you might think
With that said, we encourage you to accept every opportunity that comes your way and we wish you the best of success
Christopher Viney and Peter J Phillips
Trang 24A BOUT THE AUTHORS
C HRISTOPHER V INEY brings to this book a wealth of industry experience and academic knowledge associated with the international financial markets His appreciation of the nature
of both the theoretic and the applied functions and operations of the global financial system
is reflected in the clear and interesting presentation of issues in such a way that the reader is motivated to learn
Prior to moving into academia Chris spent 27 years in the commercial banking industry including retail banking, corporate lending, risk management, personnel, property, policy and administration His academic career included appointments at Monash University and Deakin University, Melbourne, Australia He has taught in the areas of financial markets, financial institutions management, corporate finance, treasury management and personal financial planning Chris has also taught in Singapore, Malaysia, Thailand, Indonesia and New Zealand
He has received university awards for contributions to the internationalisation of teaching and learning programs As the director of the finance international study programs at Monash and Deakin Universities, Chris has taken select groups of students overseas as part of their tertiary studies He has also published research papers on the capital markets, operational risk management, bureau de change, money laundering and education and training
Following the passing of Michael McGrath with the first edition of the text, Chris has guided the evolution of future editions of the book and it has now become a principal learning and reference source for undergraduate students, postgraduate students and industry practitioners alike Peter Phillips joined Chris ahead of the seventh edition and has been Chris’s co-author since 2011
P ETER P HILLIPS has been teaching economics and finance at the University of Southern Queensland (USQ) in Toowoomba, Australia, since 1998 Presently, he is an Associate Professor in Finance at USQ He has taught in the areas of financial markets and institutions, portfolio management and corporate finance as well as several economics courses, including macroeconomics and econometrics
In 2003 Peter completed a PhD at USQ in financial economics Since then he has published a number of papers on the topic of Self Managed Superannuation Funds (SMSFs)
in which he and his co-authors explore various aspects of the portfolios chosen by SMSF investors
Trang 25H IGHLIGHTS OF THE NINTH EDITION
C HAPTER 1 A modern financial system: an overview
introduces the financial institutions, financial instruments
and financial markets that comprise domestic and global
financial systems and explains why a stable financial
system is important for economic growth
provides a concise context that assists the reader to
understand the relationships of the material in the
following chapters
discussion moves away from the global financial crisis and
broadens to describe how theories and ideas operate in
the discipline of finance The framework is simple: risk and
reward, supply and demand
extended learning—the global financial crisis
extended learning—the impact of the Asian financial crisis
on the financial system
case study—the current possibilities of future financial
crises
C HAPTER 2 Commercial banks
contains a detailed discussion on the commercial bank,
including its role, products, off-balance-sheet business,
regulation and supervision
provides a concise explanation of the capital adequacy
and liquidity standards that apply to banks under Basel III
shifts the focus to Basel III, which was finalised in 2017,
but which will take several more years to fully implement
Basel II is out, Basel III is in
outlines aspects of the regulatory response to the global
financial crisis
extended learning—the standardised approach to credit
risk
extended learning—business continuity risk management
extended learning—corporate governance and ethics
case study—Australian banking’s prompt response to the
new Basel requirements
C HAPTER 3 Non-bank financial institutions
a current examination of investment banks, managed
funds, superannuation funds, cash management trusts,
public unit trusts, life and general insurance offices, hedge
funds, finance companies, building societies, credit unions
and export finance corporations
extended learning—project finance and structured finance
case study—hedge fund managers, regulation, and
current hedge fund trends
C HAPTER 4 The share market and the corporation
new approach focusing on Basel III
considers the management structure of a publicly listed
corporation
discusses the important roles of a stock exchange in
facilitating the listing of a corporation’s shares on the
exchange (primary market role) and the ongoing trading
of existing shares (secondary market role) on the share market
examines the managed products and derivative products offered by a stock exchange, including exchange traded funds, contracts for difference, real estate investment trusts, infrastructure funds, options, warrants and futures contracts
examines the interest rate market role, the trading and settlements roles, the information role and the regulatory roles of a stock exchange
case study—industrial-scale blockchain in Australia
C HAPTER 5 Corporations issuing equity in the share market
introduces the capital budgeting investment decision process; funding issues related to debt and equity; initial public offerings, stock exchange listing rules and alternative forms of equity issues
extended learning—current Australian Securities Exchange (ASX) listing requirements
case study—covenant-lite loans and their risk implications
C HAPTER 6 Investors in the share market
considers the role of the investor in the share market; risks associated with buying and selling shares discusses taxation; financial performance indicators and the pricing of shares
introduces share market indices and the interpretation of share market information
case study—private equity firms, angel investors and exit strategies
C HAPTER 7 Forecasting share price movements
examines fundamental analysis and technical analysis approaches to share price forecasting
updated consideration of the impact of electronic trading and technology on share prices
introduces the random walk hypothesis and the efficient markets hypothesis (EMH) within the context of forecasting share price movements
introduces behavioural finance as an alternative theoretical framework to the EMH for understanding share price movements
case study—the effects of scandal on the market
C HAPTER 8 Mathematics of finance: an introduction to basic concepts and calculations
introduces the principles of mathematical calculations that underpin financial market instruments, including simple interest, compound interest, present value, future value, yield, annuities and effective rates of interest
case study—the 4% rule and considering the feasibility of early retirement
Trang 26examines the main sources and types of short-term
intermediated and direct finance available to a business
corporation, including trade credit, bank overdrafts,
commercial bills, promissory notes, negotiable certificates
of deposit, inventory finance, accounts receivable
financing and factoring
thoughtful analysis of the role of short-term debt in the GFC
calculation of prices and yields on discount securities
case study—the demise of the London Interbank Offer
Rate (LIBOR) and the rise of the Bank Bill Swap Rate
(BBSW) in the Australian economy
C HAPTER 10 Medium- to long-term debt
identifies the main types of longer-term debt available to
a corporation, including term loans, fully drawn advances,
mortgage finance, debentures, unsecured notes,
subordinated debt and leasing
calculation of prices and yields on fixed-interest securities
extended learning—securitisation
case study—Kangaroo bond markets and the
development of the blockchain bond
C HAPTER 11 International debt markets
explores the structure of the international debt markets,
in particular the euromarkets (eurocurrency, euronote and
eurobond markets) and the US money and capital markets.
examines the main generic products offered in the
international debt markets
considers the important role of credit rating agencies in
the international debt markets
extended learning—novation, subparticipation and
transferable loan certificates
extended learning—convertible bonds and warrants
extended learning—US medium-term notes
extended learning—Standard & Poor’s credit rating definitions
case study—the triggering role played by credit agencies
in the GFC, and how they operate in Australia today
C HAPTER 12 Government debt, monetary policy and
the payments system
examines why governments issue short-term and
longer-term debt securities, the types of securities and the
pricing of those securities It also considers the purpose
and implementation of monetary policy; the operation
of the payments system, exchange settlement accounts,
real-time gross settlement and repurchase agreements
bolstered by an updated treatment of the GFC and aftermath
extended learning—fixed-coupon Treasury bonds:
price calculation using the Australian Office of Financial
Management (AOFM) formula
case study—the New Payments Platform (NPP) in Australia
and the consequent rising risk of fraud
determination and forecasting
examines the macroeconomic context and the loanable funds approach to interest rate determination and the impact of changes in related variables
considers the term structure and risk structure of interest rates within the context of the expectations theory, the segmented markets theory and the liquidity premium theory
extended learning—the yield curve and expectations theory calculations
case study—the RBA’s decision to hold interest rates in Australia until 2020
C HAPTER 14 Interest rate risk measurement
identifies methods used to measure interest rate risk and introduces an exposure management system
examines interest rate risk measurement models, including re-pricing gap analysis, duration and convexity considers internal and external interest rate risk management techniques
case study—APRA and BEAR as risk management regimes in Australia
C HAPTER 15 Foreign exchange: the structure and operation of the FX market
examines the structure, participants, operation and conventions in the global FX markets
discusses and calculates spot and forward FX quotations considers the impact of the Economic and Monetary Union of the European Union (EMU)
case study—fixed exchange rates and currency misalignments
C HAPTER 16 Foreign exchange: factors that influence the exchange rate
introduces different exchange rate regimes used by various nation-states
in the context of a floating exchange rate, considers factors that affect the determination of an equilibrium exchange rate, including relative inflation rates, national income growth rates, interest rates, expectations and central bank intervention
considers the application of regression analysis in the measurement of exchange rate sensitivity
extended learning—purchasing power parity case study—the relationship between terrorist attacks and
Trang 27Highlights of the ninth edition
examines internal and external market-based hedging
techniques using derivative products
case study—do companies hedge or speculate in FX risk
provides a concise introduction to generic derivative
products and markets, in particular futures, forwards,
option and swap contracts
case study—regulatory reforms and the ‘clearing’ of
derivatives in global banking
C HAPTER 19 Futures contracts and forward rate
agreements
examines the purpose, structure and operation of a
futures market, including structuring and calculating risk
management strategies
considers forward rate agreement contracts and the use
of an FRA to manage interest rate risk exposures
case study—defining the SPI futures price contract on the S&P/ASX 200 Index, and its strengths and vulnerabilities
in the current market
C HAPTER 20 Options
examines the purpose, structure and operation of options markets
introduces option contract strategies that may be applied
in a wide range of risk exposure scenarios case study—the Black-Scholes option-pricing model
C HAPTER 21 Interest rate swaps, cross-currency swaps and credit default swaps
examines the purpose of interest rate swaps (including facilitating speculation) and considers the construction of
a swap to manage an interest rate risk exposure
in the context of international markets, considers the construction of a currency swap to manage both an interest rate exposure and an FX risk exposure introduces the credit default swap and discusses the structure of, and parties to, a CDS
case study—two perspectives on naked credit details swaps
Trang 28vin22943_prelims_i-xxxiv.indd xxv 01/21/1911:13AM
xxv
T EXT AT A GLANCE
LEARNING OBJECTIVES These
numbered points clearly outline
what each reader should know
and be able to do by the end
of the chapter They will also
assist in exam revision Each
learning objective notes the
numbered section in which the
learning objective appears in
the chapter They are directly
linked to the end-of-chapter
summary, which systematically
works through each learning
LO 12.2 Outline features of the main debt instruments issued by the Commonwealth Government, that is,
the Treasury bond and the Treasury note, and describe the issuance process, participants and
complete relevant calculations.
LO 12.3 Describe the purpose and structure of state government central borrowing authorities.
LO 12.4 Outline the monetary policy techniques currently employed by the Reserve Bank through which
it influences the level of interest rates in Australia, including open market operations and the
impacts on system liquidity.
LO 12.5 Describe the purpose and operation of the payments system, including exchange settlement
accounts, real-time gross settlement and repurchase agreements.
Extended learning
LO 12.6 Calculate the price of a bond using the AOFM formula.
CHAPTER OUTLINE
12.1 The Commonwealth Government borrowing requirement
12.2 Commonwealth Government securities
12.3 State government securities
12.4 Monetary policy
12.5 The payments system
C HAPTER 12
Government debt,
monetary policy and
the payments system
Part 4 Government debt, monetary policy, the payments system and interest rates
12.1 The Commonwealth Government
borrowing requirement
The government must manage its financial position, including the timing of its cash flows and the
government; that is, the government funds any shortfall in short-term liquidity requirements with
period.Overafullfinancialyearthissituationgivesrisetoabudget deficit.AscanbeseeninFigure12.1,
the Commonwealth Government’s financial position has changed quite significantly throughout the
Consider the reasons
for the existence of
–31.3–56.5–52.0–44.5–23.5–47.0–40.4–37.4–33.2–18.2–14.5
–50 –40 –30 –20 –10 0 10 20 30
• The central bank requires high-value transactions in the payments system to be settled by time gross settlement (RTGS); that is, funds must be available in a bank’s exchange settlement account immediately The purpose is to reduce settlement risk and systemic risk.
• To support RTGS, the Reserve Bank provides an intra-day liquidity facility for same-day funds or
an overnight liquidity facility, known as a repurchase agreements (repo).
• The Reserve Bank will provide a repo based on underlying eligible securities An intra-day repo must be unwound by the end of the day.
continued
CASE STUDY
THE NEW PAYMENTS PLATFORM (NPP) IN AUSTRALIA AND THE RISK OF FRAUD
In Chapter 12 we examined the establishment of a new payments platform in Australia that enables transfers messages between participants and an addressing service with a simpler payment address such as a phone number or an email address.
The platform is equipped with a faster payment service that enables real-time handling and settlement interchange between financial institutions with the capability to convey more data than most of the other benefits of the new platform; however, critics argue that the number of fraudulent transactions will rise.
It is notable that most credit card frauds take place online or over the telephone and involve stealing Network, almost 85 per cent of thefts involving credit cards occurred when the details were compromised.
The NPP enables instant transfer of money, and such transfers are deemed to be irreversible Each
to be higher than credit card limits and similar to limits on transfers using BSB numbers According to critics, this is a potential problem.
Online fraud has almost doubled in the UK since a faster payment system was adopted The system had
as the ‘Friday afternoon fraud’, where a group of fraudsters hacked into the emails between solicitors and their home-buying clients on the day money was to be transferred.
The fraudsters impersonated the solicitor and communicated to the clients that the payment details had realised, the money had been transferred (Worthington, 2018) Earlier, the banks had up to three days time to detect and stop fraudulent transactions such as these (Yeates, 2018).
There is reason to be optimistic that advances in security will outpace the ingenuity of fraudsters
often compromised Australian banks are planning to introduce biometrics, including voice recognition, customers to carry out high volume transactions without a PIN or a password HSBC also experienced
Chapter 12 Government debt, monetary policy and the payments system
393
Untitled-4 393 11/27/1805:36PM
Table 12.1 illustrates a hypothetical bond tender where the government issues $120 million of
Treasurybonds.TwentymilliondollarsoftheissueisallocatedtotheReserveBankattheweighted average issue yieldannouncedfortherelevanttender.Theremaining$100millionisallottedaccording
tothebidsthatarereceived.Intheexample,theAOFMreceivescompetitivebidsfromfiveparties
Weighted average issue yield
the average of the proportional yields bid
on a bond issue
Primary market transactions
ThesystemusedinAustraliafortheprimarymarketissueofTreasurybondsisknownasthetender system.Thefederaltreasurerhasthepowertodecideonthetimingofeachtender,andonthematurities,
coupons and quantities of bonds to be marketed. This is currently managed through theAustralian Office of Financial Management (AOFM).
Australian Office
of Financial Management (AOFM)
a body established to manage commonwealth government debt issues
Bid (% p.a.)Yield Competitive bids ($ millions) competitive ($ millions)Allotment: Allotment: Reserve Bank ($ millions)
Table 12.1 Treasury bond series tender: bids and allotments
LO 12.3 Describe the purpose and structure of state government central borrowing authorities.
LO 12.4 Outline the monetary policy techniques currently employed by the Reserve Bank through which
it influences the level of interest rates in Australia, including open market operations and the impacts on system liquidity.
LO 12.5 Describe the purpose and operation of the payments system, including exchange settlement accounts, real-time gross settlement and repurchase agreements.
Extended learning
LO 12.6 Calculate the price of a bond using the AOFM formula.
CHAPTER OUTLINE
12.1 The Commonwealth Government borrowing requirement
12.2 Commonwealth Government securities
12.3 State government securities
12.4 Monetary policy
12.5 The payments system
C HAPTER 12
Government debt, monetary policy and the payments system
PART INTRODUCTIONS A short
overview of the material that is covered
in the following chapters is provided
They are a helpful introduction to
how the key concepts, institutions or
instruments work together and show
how they fit within the larger picture.
CHAPTER OPENERS Each chapter
begins with a short overview of the
information contained in the chapter,
providing not only an introduction to
the chapter, but also a useful study
reference.
CHAPTER SNAPSHOT This brief outline at the beginning of every chapter launches the reader into the content, providing a helpful overview of what is to come and placing the ideas in their broader context.
KEY TERMS, MARGIN DEFINITIONS AND THE KEY TERMS LIST Each key term
or concept is highlighted in the text at its first appearance, and the definition is provided in the corresponding margin A boxed list of these key terms appears at the end of each chapter and each entry is followed by the page on which it first appeared All of the key terms, with their definitions, appear in the glossary.
CASE STUDY Found at the end of every chapter, each financial news case study contains excerpts from financial articles that provide real-world examples of concepts discussed within the chapter They are followed by related discussion questions providing the opportunity for self-assessment and putting into practice what has been learned.
Trang 29Text at a glance
EXTENDED LEARNING The extended learning sections
provide an additional resource for self-assessment and
a variety of activities designed to address the more
complex aspects of the chapter These sections are
accompanied by extended learning questions which test
students’ understanding of the material.
Chapter 10 Medium- to long-term debt
Reflection points
• A lease is a contract whereby the owner of an asset (the lessor) allows another party (the
lessee) to use that asset for an agreed period in return for lease payments Major providers of
lease finance are banks and finance companies.
• Advantages of lease financing are that it does not use up lines of credit, it provides 100.00 per
cent financing, payments can be matched with revenue generation, payments are generally tax
deductible, it may not breach existing loan covenants and assets can be leased for the actual
periods they are needed.
• An operating lease is a full-service lease where an asset is leased for a relatively short period,
then returned to the lessor The lessor maintains and insures the asset and leases it again
and again.
• A finance lease is a long-term net lease where an asset is leased once The lessee maintains
and insures the asset and makes periodic lease payments The lessee is required to make a
lump-sum residual payment at the completion of the lease contract.
• Sale and lease-back occurs when the original owner of an asset sells the asset and then enters
into an arrangement to lease back the asset.
• A cross-border lease occurs when parties to a lease extend into another country; it involves
foreign exchange risk.
• A direct finance lease involves two parties, the lessor and the lessee The lessor retains
ownership of the asset and may also seek additional guarantees to support the lease contract.
• A leveraged finance lease is an arrangement whereby the lessor borrows to fund the purchase
of an asset that is to be leased Often a lessor partnership is formed for big-ticket items such
as ships and aircraft Because of the complexity of leveraged leasing arrangements, a lease
manager will be responsible for the management of the contract.
CASE STUDY
THE KANGAROO BONDS AND BLOCKCHAIN BOND-I’s
Kangaroo bonds or Matilda bonds are Australian dollar-denominated bonds issued by non-Australian
domestic bond market after Australian Government Securities (AGS) and semi-government securities
high credit quality who participate in the Australian foreign exchange and derivative markets The
domestic bond markets (Batten, Hogan & Szilagyi, 2008).
A company normally enters a foreign market to gain access to better interest rates Kangaroo bonds
corporation This will help to lower the interest expense and cost of borrowing for the issuer These
• Money is a medium of exchange that facilitates transactions for goods and services.
• With wealth being accumulated in the form of money, specialised markets developed to enable the efficient transfer of funds from savers (surplus entities) to users of funds (deficit entities).
• Financial instruments incorporate attributes of risk, return (yield), liquidity and time-pattern combinations of these attributes.
• By encouraging savings, and allocating savings to the most efficient users, the financial system economy and the financial system are connected.
LEARNING OBJECTIVE 1.2
Explain the functions of a modern financial system and categorise the main types of financial institutions, including depository financial institutions, investment banks, contractual savings institutions, finance companies and unit trusts.
• A financial system encourages accumulated savings that are then available for investment within an economy.
• A modern financial system comprises financial institutions, instruments and markets that provide
a wide range of financial products and services.
• A range of different financial institutions has evolved to meet the needs of financial market participants and to support economic growth.
• Depository institutions, such as commercial banks, building societies and credit unions, customers.
• Investment banks tend to specialise in the provision of advisory services to clients (e.g merger and acquisition advice).
• Contractual savings institutions, such as insurance offices and superannuation funds, enter into member of a fund, a specified sum when a nominated event occurs.
• Finance companies sell debt instruments directly to surplus entities and then use those funds to provide loans and lease financing to borrowers.
• Unit trusts sell units in a trust The accumulated funds in the trust are pooled and invested in asset classes specified within the trust deed.
• Commercial banks dominate in terms of their share of the assets of financial institutions.
LEARNING OBJECTIVE 1.3
Define the main classes of financial instruments that are issued into the financial system, that is, equity, debt, hybrids and derivatives.
• Financial instruments are central to any financial relationship between two parties.
• Where the saver acquires an ownership claim on the deficit entity, the financial instrument is referred to as equity.
Master before you move on
MASTER BEFORE YOU MOVE ON These chapter summaries comprehensively review the topics covered
in each chapter and are linked directly to the learning objectives, listing each learning objective and a summary
of the relevant material.
REFLECTION POINTS Located after every major section
within each chapter, the reflection points highlight the
most significant material covered and provide regular
summaries They are a useful tool for revision, helping
students to identify areas that require further study.
END OF CHAPTER QUESTIONS A number of different question types are included to test student recall and understanding of the material covered in the chapter
The Essay questions provide the opportunity to put the concepts that have been learned into practice, highlighting students’ ability to analyse and evaluate the material.
The Extended learning questions relate to the in-depth extended learning sections and require students to demonstrate a deeper understanding of the concepts and theories presented in the chapter.
341
Chapter 10 Medium- to long-term debt C
• Advantages of lease financing are that it does not use up lines of credit, it provides 100.00 per
deductible, it may not breach existing loan covenants and assets can be leased for the actual
periods they are needed.
• An operating lease is a full-service lease where an asset is leased for a relatively short period
and again.
• A finance lease is a long-term net lease where an asset is leased once The lessee maintains
lump-sum residual payment at the completion of the lease contract.
• Sale and lease-back occurs when the original owner of an asset sells the asset and then enters
into an arrangement to lease back the asset.
• A cross-border lease occurs when parties to a lease extend into another country; it involves
foreign exchange risk.
• A direct finance lease involves two parties, the lessor and the lessee The lessor retains
ownership of the asset and may also seek additional guarantees to support the lease contract.
• A leveraged finance lease is an arrangement whereby the lessor borrows to fund the purchase
as ships and aircraft Because of the complexity of leveraged leasing arrangements, a lease
manager will be responsible for the management of the contract.
LEARNING OBJECTIVE 10.6
Understand the detailed process of financial asset securitisation.
Securitisation
Financial institutions and corporations accumulate financial assets and other entitlements, such
which generate future cash flows over time There are no secondary markets which specifically
sale of these types of non-liquid financial assets that have specified future cash flows associated
interest payments and principal repayment.
Securitisation is a form of financing in which the cash flows associated with existing financial
assets are used to service funding raised through the issue of asset-backed securities For example,
with similar characteristics, such as term to maturity The loan originator (e.g bank) then sells the
pay for the purchase of the mortgage assets from the loan originator, the trustee of the SPV raises
the funds by issuing new securities to investors, particularly institutional investors.
Institutional investors are attracted to this type of investment because, in theory, the level of
risk is relatively low because the securities issued by the SPV trustee are supported by the cash
the mortgage loans, the trustee receives the future loan instalments paid by the housing loan
institutional investors and repays those securities on maturity.
The diagrammatic representation of the securitisation process is shown in Figure 10A.1, and
may be summarised as follows:
• Financial assets (e.g housing mortgage loans) accumulate and are funded on the balance sheet
by a loan originator, such as a commercial bank.
Extended learning
Part 1 Financial institutions
Essay questions
Write short essay-type responses to the following questions Make sure that you are able to explain
in your own words the points you raise in relation to each question.
1 The concepts of risk, reward, supply and demand underlie the complexity of financial expected by a shareholder in Telstra and the price at which Telstra shares change hands on the stock market? (LO 1.1)
2 Describe the flow of funds that characterises any financial system. (LO 1.1)
3 Explain why an investor should consider the time-pattern of cash flows and the variability of investment on the basis of the total cash flows received. (LO 1.1)
4 Risk preferences shape the decisions that people and businesses make when under conditions decision makers and explain how each type of decision maker will choose differently when confronted with a risky choice. (LO 1.2)
5 Identify and discuss three changes in the distribution of assets among the financial institutions
it (2008 to 2018) The information required is presented in Table 1.1. (LO 1.2)
6 Financial instruments may be categorised as equity, debt or derivatives Discuss each category
• Is there a large budget deficit and a lot of government debt outstanding?
• Is there loose monetary policy and high inflation?
• Is the domestic economy in, or at risk of, a recession?
• Is there a large current account deficit?
• Is there a large amount of foreign debt?
• Is there an asset price boom (especially credit driven) occurring?
• Are there a lot of bad debts in the banking system, or is there a poor system of bank supervision?
• Has there been a lot of unhedged foreign currency borrowing?
• Are there poor accounting standards, few disclosure requirements or ambiguous bankruptcy procedures?
These 12 points form a strong starting point for financial crisis analysis However, you should be aware that all of the factors will not always be evident, and that the existence of some factors does will have its own particular set of defining characteristics.
Trang 30FM.indd xxx 11/27/1807:02PM
xxx
The following websites have been selected as useful and interesting sources of information relevant to financial
is just the beginning! See your library’s subject page on finance/economics/business where there will be listings
available to use/borrow, often with their call numbers and the general call numbers to look for your subject These
pages may also list significant journals in your field as well as databases and newspapers.
B ACKGROUND READING
Both Yahoo! and Google provide good entry points for
a gateway to other resources Yahoo! has a specific
Australian and New Zealand site, www.yahoo.com.au/
finance Google Finance has an international site, www.
This is a list of some of the suggested databases your
and information If your institution does not have access
through another institution, so check with your library
about borrowing rights at other universities.
Proquest: Academic research library Covers finance,
has full text articles.
Connect4: Annual report collections Business provides
full text annual reports from various Australian companies
including some company financial statements.
APA Full Text (Australian Public Affairs full text) Lists a
large range of Australian periodicals with some access
to full text.
Proquest: Banking Information Sources International
database, full text article access Covers banking and
industry and the financial services industry.
Expanded Academic ASAP Full text articles available, international.
Factiva Full text available, covers most Fairfax publications including Business Review Weekly, The Australian Financial Review and The Age.
Science Direct Full text, international Includes access to journals such as Journal of Financial Markets, Journal Banking and Finance.
You can find these databases by selecting your subject subject pages for relevant journal listings Alternatively, library catalogue to check for access You may need a password when accessing them off campus.
W ORLD CURRENCIES
http://en.wikipedia.org/wiki/List_of_circulating_currencies This site has a comprehensive list of the majority member
states of the United Nations with their ISO-4217 currency codes and abbreviations listed.
www.xe.com/currencyconverter provides a convenient foreign exchange currency converter.
FM.indd xxxii 11/27/1807:01PM FM.indd xxxii 11/27/1807:01PM xxxii
A career in finance can be established in any country, economic sector, industry sector, business or government and the range of career opportunities is enormous.
For example, commercial banking provides an enormous range of options including retail finance, corporate lending, finance opportunities including mergers and acquisitions, project finance, securitisation, underwriting and venture capital.
For those interested in portfolio management, there are many fund managers, including superannuation funds, operating in Australia And those people interested in working directly with clients might find that personal financial planning is another career opportunity to explore.
Small, medium and large businesses all require people skilled in finance to manage their assets, liabilities and cash flows Government departments and authorities also require finance graduates to assist with the financing of capital or recurrent expenditures.
Finance is global and there are possibilities for working in a range of developing and advanced financial markets
During your studies you may find certain areas of finance that particularly excite and interest you Research the types the organisations and carefully consider the organisation’s guidelines for graduate employment Most large employers include a link to this information on their website Some examples include:
ANZ Banking Group – www.anz.com.au/about-us/careers
Commonwealth Bank – www.commbank.com.au/about-us/careers.html
National Bank of Australia – www.nab.com.au/about-us/careers
Westpac Banking Corporation – www.westpac.com.au/about-westpac/careers
Goldman Sachs – www.goldmansachs.com/careers
Macquarie Bank – www.macquarie.com.au/careers
Reserve Bank of Australia – www.rba.gov.au/careers
Australian Prudential Regulation Authority – www.apra.gov.au/aboutAPRA/workingatAPRA
Department of Treasury – www.treasury.gov.au/About-Treasury/recruitmentandcareers
Telstra Corporation – www.telstra.com.au/careers
BHP Billiton Limited – www.bhpbilliton.com/careers
KPMG – www.kpmg.com/au/en/careers
Ernst & Young – www.ey.com/au/en/careers
Tips for online applications
Before you start
• Allow yourself plenty of time as each application Read the application instructions carefully, to determine whether you:
– have the appropriate/minimum software and hardware to undertake this process – have the option of downloading a copy of the application form to assist you in preparing all relevant information and in filling out the form – have to fill out the form in one sitting, or whether you have the option of saving, exiting out and returning to the form when you are ready
– know what information you will be required
to include in the application form (course/unit when you are completing the forms – know whether additional information (cover letters, etc.) can be attached if desired.
• Obtain a copy of your academic transcript.
• Collect all the information you require, for example your résumé to cut and paste into the application form.
• If you need to use computer labs or library computers, book ahead of time.
CAREERS IN FINANCE Introduces students to the enormous career opportunities that exist in both local and international economics A list of web addresses
of select employers of finance graduates is a source of organisation-specific career information A useful guide
to preparing online applications is also presented.
EXPLORING FINANCE ON THE WEB This updated
resource provides a comprehensive list of useful
finance websites including central banks, financial
institutions, government sites, exchanges and markets
It also provides online learning tools such as financial
newspapers and magazines, currency converters,
background reading and suggested databases.
GLOSSARY This useful list of
definitions contains all of the key terms
and concepts as they appear in the
margin notes.
FINANCIAL ABBREVIATIONS This comprehensive list
covers all the major financial abbreviations used both
in the text and in the financial world, providing a quick,
easy-to-use reference point It is helpfully located on the
inside front cover to make looking up terms easy.
WORLD CURRENCIES Located on the inside back cover for ease of reference, this handy, updated table lists the currencies of all the world’s major countries, as well as their common abbreviations.
acceptance a bank puts its name on a bill issued by a third party; bank accepts primary liability to repay the face value of the bill at maturity
acceptor a bank that puts its name on the face of a bill and takes primary liability to repay the holder at maturity
accounting ratios measures of a company’s financial and management performance, strength and efficiency
accounts receivable an asset on the balance sheet representing amounts due to the business
accounts receivable financing a loan obtained by
a firm using current accounts receivable debtors as security to support the loan
accumulation index measures changes in share prices, plus the reinvestment of dividends received
active ETFs a type of ETF that deploys strategies designed to outperform a market index
active FX strategy hedging techniques are continually adjusted in response to forecast changes in exchange rates
active investment a portfolio structure based on share analysis, new information and risk/return preferences
age pension a limited regular income stream paid by a government to older retired persons
agency problem the conflict of interest that may exist between shareholders and management of a corporation
agent bank conducts the ongoing administration role
of an established syndicated loan facility
American depositary receipt (ADR) a security (depositary share) issued by a US depositary bank company
American-type options options that can be exercised
at any time up to the expiration date
amortised loan a loan that is progressively repaid
by regular equal instalments that comprise interest payments and part-principal repayment
amortised loan instalments regular and equal loan instalments that comprise the current interest payment due, plus part repayment of the loan principal outstanding
annuity a series of cash flows of equal amount, equally spaced over time
annuity due periodic cash flows that occur at the beginning of each period
arbitrage simultaneously taking advantage of buy and sell price differences between markets
arbitrageur a party that simultaneously conducts buy and sell transactions in two or more markets in order to take advantage of price differentials between markets
ARBL gap a positive ARBL gap exists when assets are re-priced before liabilities, and a negative ARBL gap exists when liabilities are re-priced before assets
ascending triangles form an uptrend characterised by increasing bottoms and horizontal tops
ask price the price at which an FX dealer will sell the base currency
asset management a bank restricts growth in its lending to the level of funds available from its depositor base
asset portfolio a combination of assets, each comprising attributes of return, risk, liquidity and timing
of cash flows
asset transformation the ability of financial intermediaries to provide a range of products that meet customers’ portfolio preferences
assets re-priced before liabilities (ARBL) a risk management principle that ensures net margins and profitability are protected
assets test minimum level of assets to be held by an entity seeking listing on a stock exchange
ASX Trade the electronic securities trading platform used by the ASX to facilitate trading in equity securities listed on the ASX
ASX Trade24 the electronic securities trading platform used by the ASX to facilitate trading in futures, options and contracts for difference listed on the ASX
at-the-money the physical market price and the option exercise price are the same
Austraclear an electronic clearing house for a range
of financial instruments, including Treasury bonds
Australian Office of Financial Management (AOFM)
a body established to manage Commonwealth Government debt issues
Australian Securities and Investments Commission (ASIC) the regulatory body responsible for the supervision of the Corporations Act in Australia
authorised deposit-taking institution (ADI) financial institution authorised by APRA to accept retail deposits
in Australia
Glossary
Trang 31Connect includes animated tutorials, videos and additional
embedded hints within specific questions to helf you succeed
The Connect Success Academy for Students is where you’ll find
tutorials on getting started, your study resources and completing
assignments in Connect Everything you need to know about
Con-nect is here!
Visual progress
Connect provides you with reports to help you identify what you should study and when your next assignment is due, and tracks your performance Connect’s Overall Performance report allows you
to see all of your assignment attempts, your score on each attempt, the date you started and submitted the assignment, and the date the assignment was scored
To learn more about McGraw-Hill Connect®, visit
http://www.mheducation.com.au/student-connect
McGraw-Hill Connect® is the only learning platform that continually adapts to you, delivering precisely what you need, when you need it
Trang 32Adaptive learning
No two students are the same, so why should their learning
assessment and artifical intelligence to personalise the learning experience for each individual student As
the global leader in adaptive and personalised learning technologies, McGraw-Hill Education is pioneering ways to improve results and retention across all disciplines
SmartBook
Fuelled by LearnSmart, SmartBook is the first and only
adaptive reading experience available today Starting with
an initial preview of each chapter and key learning objectives,
students read material and are guided to the topics they most
need to practise at that time, based on their responses to a
continuously adapting diagnostic To ensure concept mastery
and retention, reading and practice continue until SmartBook
directs students to recharge and review important material
they are most likely to forget
http://www.mheducation.com.au/student-smartbook
and adaptive learning resource proven to strengthen memory recall, increase retention and boost grades
LearnSmart
LearnSmart maximises learning productivity and efficiency
by identifying the most important learning objectives for each student to master at a given point in time It knows when
students are likely knowledge from their short-term to long-term memory LearnSmart is proven to improve academic performance, ensuring higher retention rates and better grades
Trang 33The following websites have been selected as useful and interesting sources of information relevant to financial institutions, instruments and markets As you continue your search of the internet you will find many more sites; this
is just the beginning! See your library’s subject page on finance/economics/business where there will be listings
of search terms for the library catalogue and for databases, lists of subject-specific dictionaries and resources available to use/borrow, often with their call numbers and the general call numbers to look for your subject These pages may also list significant journals in your field as well as databases and newspapers
Both Yahoo! and Google provide good entry points for the
latest news, facts and figures as well as providing a gateway
to other resources Yahoo! has a specific Australian and
This text includes a glossary of the main financial market words referred to in the book As you extend your understanding
provides online access to over 6000 words and 20 000 links
It is the biggest financial glossary on the web
This is a list of some of the suggested databases your
library may have access to that contain finance articles
and information If your institution does not have access
to all the databases you may be able to get access
through another institution, so check with your library
about borrowing rights at other universities
has full text articles
full text annual reports from various Australian companies
including some company financial statements
APA Full Text (Australian Public Affairs full text) Lists a
large range of Australian periodicals with some access
to full text
database, full text article access Covers banking and
industry and the financial services industry
international
Factiva Full text available, publications include Business Review Weekly, The Australian Financial Review and The Age
Science Direct Full text, international Includes access to journals such as Journal of Financial Markets, Journal
of International Money and Finance and Journal of Banking and Finance
You can find these databases by selecting your subject (finance, business, economics) and searching the library subject pages for relevant journal listings Alternatively, look them up in alphabetical order through the online library catalogue to check for access You may need a password when accessing them off campus
http://en.wikipedia.org/wiki/List_of_circulating_currencies This site has a comprehensive list of the majority member states of the United Nations with their ISO-4217 currency codes and abbreviations listed
E XPLORING FINANCE ON THE WEB
Trang 34FINANCE MEDIA
Although not all of these may be available from your
library (either in hard copy or through online access with
a password) it is worth investigating the possibilities
of interlibrary loans Ask your subject librarian for
information about accessing the catalogues of other
libraries
Wall Street Journal
http://online.wsj.com/public/asia
The Wall Street Journal has great information available
online without subscription
MSN Money
www.money.msn.com
A useful site that has good coverage of financial events
in the ‘news’ section including video clips
The Financial Times
www.ft.com/home/ukOnline access to full text articles from either the UK, US
or Asian editions of the paper
Fortune Magazine
http:www.fortune.comFortune Magazine home, access to full text articles
INSTITUTIONS AND AUTHORITIES
The Reserve Bank of Australia website www.rba.gov.au/links
provides direct link access to the websites of:
central banks
EMEAP members
other international organisations
Australian government departments and
authorities
Australian legislation
Australian financial sector organisations
ANZ Banking Group – www.anz.com.au
Commonwealth Bank of Australia – www.commbank.com.au
National Australia Bank – www.nab.com.au
Westpac Banking Corporation – www.westpac.com.au
INSTITUTIONS
Allianz – www.allianz.com
Citibank – www.citibank.com
Credit Suisse – www.credit-suisse.com
Goldman Sachs – www.goldmansachs.com
ING Bank – www.ing.com
JPMorgan Chase & Co – www.jpmorgan.com
UBS Investment Bank – www.ubs.com
Fitch Ratings – www.fitchibca.com
Moody’s Investors Service – www.moodys.com
Standard & Poor’s – www.standardandpoors.com
Bloomberg – www.bloomberg.com
Dow Jones – www.dowjones.com
Thomson-Reuters – www.reuters.com
Australian Securities Exchange – www.asx.com.au
New Zealand Stock Exchange – www.nzx.com
CME Group (Chicago Board of Trade and Chicago Mercantile Exchange) – www.cmegroup.com
Hong Kong Exchange – www.hkex.com.hk
Euronext (formerly London International Financial Futures Exchange) – www.euronext.com
London Metal Exchange – www.lme.com
London Stock Exchange – www.londonstockexchange.com
Lloyds of London – www.lloyds.com
NASDAQ – www.nasdaq.com
New York Stock Exchange – www.nyse.com
Shanghai Stock Exchange – http://english.sse.com.cn/
Singapore Exchange – www.sgx.com
ASX Trade24 (Futures) – www.asx.com.au
Tokyo Stock Exchange – www.jpx.co.jp/english/
Trang 35A career in finance can be established in any country, economic sector, industry sector, business or government and the range of career opportunities is enormous For example, commercial banking provides an wide range of options including retail finance, corporate lending, international banking, treasury and information technology, to name but a few Investment banking also offers specialist finance opportunities including mergers and acquisitions, project finance, securitisation, underwriting and venture capital.
For those interested in portfolio management, there are many fund managers, including superannuation funds, operating in Australia And those people interested in working directly with clients might find that personal financial planning is another career opportunity to explore
Small, medium and large businesses all require people skilled in finance to manage their assets, liabilities and cash flows Government departments and authorities also require finance graduates to assist with the financing of capital or recurrent expenditures
Finance is global and there are possibilities for working in a range of developing and advanced financial markets During your studies you may find certain areas of finance that particularly excite and interest you Research the types
of organisations that provide career opportunities in your areas of interest; understand the structure and culture of the organisations and carefully consider the organisation’s guidelines for graduate employment Most large employers include a link to this information on their website Some examples include:
C AREERS IN FINANCE
Before you start
can take between two and four hours at a minimum!
Read the application instructions carefully, to
determine whether you:
– have the appropriate/minimum software and
hardware to undertake this process– have the option of downloading a copy of the
application form to assist you in preparing all relevant information and in filling out the form
you have the option of saving, exiting out and returning to the form when you are ready
– know what information you will be required
to include in the application form (course/unit details, results etc.) so you can have this handy when you are completing the forms
letters, etc.) can be attached if desired
course/unit details Also have electronic access to your résumé to cut and paste into the application form
computers, book ahead of time
Trang 36Working on the application
Complete responses offline and cut and paste into
the application
form if possible
application forms have spell checks
electronically Typically, employer websites experience
a huge rush towards the application deadlines You
may experience delays or be unable to submit due to
technical problems if sites are overloaded
numbers are correct! All too often students
record these inaccurately—it is vital that you are
contactable, particularly if employers wish to
schedule you for testing/interviews If they can’t
reach you, they won’t bother trying again, given the
numbers of applications they will be processing
unsure whether your application has been received,
contact the relevant recruitment coordinator to
confirm receipt of your application
or have questions regarding the form, contact the
graduate recruiter in that organisation as soon as
possible
(and make a note of any contact you have with the organisation)—it will help if and when you are invited to an interview
before you hit the ‘send’ button Does it present you
in the best possible way? You will not get another chance to revise it!
Distinguish yourself from other applicants
Employers advise that the best way to make your application stand out are the simple things:
would for a paper-based application Just because
it is an online form doesn’t mean that you should use more informal or text language, or insert symbols, for example smiley faces
you—spell checks don’t pick up everything
thought out and tailored to each employer, not
a generic cut-and-paste answer Use proper paragraphs, not just a list of dot points
These tips may seem obvious, but you’d be amazed
at the number of applications which are not successful because they haven’t followed this advice!
Trang 39Financial institutions
Thistextbookdiscussesthestructure,functionsandoperationsofamodernfinancialsystem.Youaregoingto learn about financial institutions, financial instruments and financial markets. Although institutions,instrumentsandmarketsarefundamentallyalike,theymaybedifferentiatedbysize,terminology,thelevelofgovernmentregulationandprudentialsupervision.Despitethiscomplexity,underlyingalloftheinstrumentsthataretradedontheworld’sfinancialmarketsaresomebasicideas:riskandreward,supplyanddemand.Internationalisation of the financial markets has, in part, occurred because of the development ofsophisticated technology-based information systems and product delivery systems. This has allowed newproductsandmarketstoevolve,andanenormousincreaseinthevolumeandspeedoftheflowoffundsthroughtheinternationalfinancialmarkets.Aswillbeseen,thecombinationofglobalisation,deregulation,technologyandcompetitionhasencouragedenormousinnovationandchangewithinfinancialinstitutions,instrumentsandmarkets
Think of a financial system as a number of financial institutions and markets through which fundsmovebetweenlendersandborrowers.Theinstitutionsandmarketsthatfacilitatethisflowoffundsdevelopthefinancialinstrumentsandtechniquesthatencouragesavingsandinvestment.Thefinancialsystemalsoprovidestheframeworkthroughwhichcentralbanksandprudentialregulatorsinfluencetheoperationsofparticipantsinthefinancialsystem.Mostimportantly,acentralbank,throughitsmonetarypolicyinitiatives,affectsthelevelofinterestrates,economicactivityandbusinessperformance
Afinancialsystemisessentialinfacilitatingeconomicgrowthandfutureproductivecapacityinacountry.The provision of finance to business allows economic growth to occur, which should lead to increasedproductivity,increasedemploymentandahigherstandardofliving.Amodern,soundandefficientfinancialsystemencouragestheaccumulationofsavingsthatarethenavailableforinvestmentinproductivecapitalwithinaneconomy
Chapter 1 presents an overview of a modern financial system and provides a context for the moredetailed studies that occur throughout the textbook. It introduces the main categories of financialinstitutions,discussesthefunctionsoffinancialmarketsandprovidesanoverviewofthetypesofinstrumentsthatarecreatedwithinthemarkets.AttheendofChapter1,twoextendedlearningsectionsareprovided:
‘Globalisationofthefinancialmarkets’and‘TheimpactoftheAsianfinancialcrisisonthefinancialsystem’.Chapter2providesadetailedanalysisoftherolesandfunctionsofthecommercialbanks.Commercialbanksarethelargestfinancialinstitutionsprovidingsavings,lendingandawiderangeofotherfinancialservicesfortheircustomers.Theassets,liabilitiesandoff-balance-sheetbusinessofcommercialbanksareanalysedindetail.Attheendofthechapter,threeextendedlearningsectionsareprovided:‘Thestandardisedapproachtocreditrisk’,‘Businesscontinuityriskmanagement’and‘Corporategovernanceandethics’
Chapter 3 extends the discussion of financial institutions further and looks at the operations andsignificanceofothertypesoffinancialinstitutions.Inparticularthechapterconsidersinvestmentbanks,managedfunds,superannuationfunds,cashmanagementtrusts,publicunittrusts,lifeinsuranceoffices,general insurance offices, hedge funds, finance companies, general financiers, building societies, creditunionsandexportfinancecorporations.Attheendofthechapter,anextendedlearningsectionisprovided:
‘Projectfinanceandstructuredfinance’
Trang 40C HAPTER 1
A modern financial
system: an overview
Learning objectives
LO 1.1 Understand the basic frameworks that underlie the facts that characterise financial institutions,
financial instruments and financial markets
LO 1.2 Explain the functions of a modern financial system and categorise the main types of financial
institutions, including depository financial institutions, investment banks, contractual savings
institutions, finance companies and unit trusts
LO 1.3 Define the main classes of financial instruments that are issued into the financial system, that is,
equity, debt, hybrids and derivatives
LO 1.4 Discuss the nature of the flow of funds between savers and borrowers, including primary
markets, secondary markets, direct finance and intermediated finance
LO 1.5 Distinguish between various financial market structures, including wholesale markets and retail
markets, and money markets and capital markets
LO 1.6 Analyse the flow of funds through the financial system and the economy, and briefly discuss the
importance of ‘stability’ in relation to the flow of funds
1.1 Theory and facts in finance
1.2 The financial system and financial institutions
1.3 Financial instruments
1.4 Financial markets
1.5 Flow of funds, market relationships and stability