Finance Principles – Business Integrals

Finance Principles

Financial Markets and Money

Money, as one type of financial asset, functions as:

Medium of exchange
Store of wealth
Divisible

Types of Financial Institutions

Authorised deposit-taking institutions (commercial banks)	Government-licensed ADIs e.g. commercial banks
Non-ADI financial institutions	Investment Banks – do not take deposits – they help companies raise capital
Insurers and fund managers	Manage portfolios and risk

Types of Financial Markets

Retail and Wholesale Markets
Retail Markets	Direct flows of small amounts of funds between households, firms and intermediaries E.g. home loans
Wholesale Markets	Large flows of funds between institutional lenders and borrowers E.g. Investment banks and IPOs
Direct and Indirect Finance
Direct Finance	Direct between lender and borrower (often with help of broker) •Avoids costs of intermediation •However, costs of search and transaction costs (legal, advisory) incurred
Indirect Finance	Finance undertaken through intermediary (e.g. bank) •Allows transformation and matching of assets and maturity •Economies of scale by spreading fixed costs •Risk management – intermediary exposed to borrower risk

Off Balance Sheet transactions include: performance guarantees, underwriting, loan approvals, derivatives.

Types of Financial Instruments

Corporate Governance