MAF101 Lecture Notes - Lecture 9: Telstra, Financial Instrument, Bond Market
14 Jun 2018
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TOPIC 5 Financial Markets and Financial Institutions -Lecture 9
*REAL ASSETS VERSUS FINANCIAL ASSETS
The wealth of a society is determined by the productive capacity of its economy, that is, the
goods and services its members can create. This capacity is a function of the real assets of
the economy: the land, buildings, machinery , and knowledge that can be used to produce
goods and services.
• Financial Assets such as shares and bonds, are no more than “paper” assets. They do
not contribute directly to the productive capacity of the economy. These asset are the
means that investors hold their claims on real assets. That is, financial assets are claims
to the income generated by real assets.
• Real assets generate net cash flows to the economy, financial assets define the
allocations of the cash flows.
➢ Investors buy financial assets (shares and bonds) from companies, the firms then use
the money they receive from investors to buy real assets such as plant, equipment,
technology or inventory. These real assets are used to generate cash flows or income
in the economy. The cash flows are then distributed back to investors in the form of
returns.
Example: You cannot own auto plant or factory (real asset), you can still buy shares in Ford
or Toyota (financial assets) and thereby share in the cash flows derived from the production
of automobiles.
*WHAT ARE FINANCIAL MARKETS?
A complex of institutions, procedures and arrangements that facilitate the transfer of funds
from one entity in the economy to another.
Examples of financial sub-markets:
stockmarket - shares
Debt market
Foreign exchange
*FINANCIAL MARKETS
•Financial markets are the markets in which financial assets are bought and sold.
•The role of financial markets is to ensure efficient allocation of available capital to
profitable investments.
•Financial markets also fulfil an important function as a liquid and accessible secondary
market for acquisition and sale of securities. This is a vital part of portfolio construction
and management.
*PRIMARY AND SECONDARY MARKETS
Distinction is based on the nature of the financial asset being traded ie new asset or
existing assets.
•primary markets involve the issue of new instruments by a borrower eg IPO(new shares)
or opening a new bank account. Funds raised by governments and businesses.
•secondary markets trade in existing instruments (securities). Eg selling your Telstra
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Document Summary
Topic 5 financial markets and financial institutions -lecture 9. The wealth of a society is determined by the productive capacity of its economy, that is, the goods and services its members can create. They do not contribute directly to the productive capacity of the economy. These asset are the means that investors hold their claims on real assets. That is, financial assets are claims to the income generated by real assets. allocations of the cash flows: real assets generate net cash flows to the economy, financial assets define the. Investors buy financial assets (shares and bonds) from companies, the firms then use the money they receive from investors to buy real assets such as plant, equipment, technology or inventory. These real assets are used to generate cash flows or income in the economy. The cash flows are then distributed back to investors in the form of returns.
