The Financial System

Financial institutions, instruments and markets facilitating

transactions for goods and services and financial transactions.

Copyright  2003
Copyright  2003
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Introduction
• Money
– Medium of exchange
– Facilitates saving
– Store of wealth
– Allows specialisation in production.

Copyright  2003
Copyright  2003
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PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
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Stanger
Role of the Financial System
– Facilitate exchange by
 Bringing opposite parties together
 Establishing rates of exchange, i.e. prices
• Surplus units
– Savers of funds available for lending

• Deficit units
– Borrowers of funds for capital investment and
consumption

Copyright  2003
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FinancialInstruments
Accountingand
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1 Introduction (cont.)
• Financial instrument
– Issued by a party raising funds, acknowledging
a financial commitment and entitling holder to
specified future cash flows
• Flow of funds
– Movement of funds through the financial system
between savers and borrowers giving rise to
financial instruments

Copyright  2003
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FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney 4
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1.2 Functions of the
Financial System
• Liquidity
– Ability to sell an asset within reasonable time at
current market prices and for reasonable
transaction costs

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FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney 5
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1.2 Functions of the
Financial System (cont.)
• A good financial system
– Encourages savings
– Savings flow to the most efficient users
– Implements the monetary policy of
governments by influencing interest rates
– The combination of assets and liabilities
comprising the desired attributes of return, risk,
liquidity and timing of cash flows

Copyright  2003
Copyright  2003
McGraw-Hill
McGraw-Hill
Australia
Australia
Pty Ltd
PtyPPTs
Ltd t/a
PPT Slides t/a Financial Institutions,
FinancialInstruments
Accountingand
by Willis
Markets 4/e by Christopher Viney 6
Slides
Slidesprepared
preparedbybyAnthony
Kaye Watson
Stanger