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ACFI 2005 : Finance - Tutorial Solutions

Tute 1: 07/09/12

Chapter 1

A modern financial system: an overview

2. (a) Discuss the role of money in a financial system.

• Money is a financial asset that facilitates financial and economic transactions. • Money is a medium of exchange—swapped for goods and services. • Money is a store of value—wealth is held or measured in money terms. • Money is a standard of deferred payment—used to record indebtedness. • Money is a unit of account—transactions are priced in money terms. • Currency is generally divisible, portable and durable.

(b) Does money have to be currency? If not, what are some alternatives?

• Money is anything that is universally acceptable as a medium of exchange. • Further, money generally has the characteristics of being divisible and a store of value. • Examples—currency, EFTPOS and digital money.

4. The major financial institutions within the international markets fall into five classifications. Identify and briefly explain each of these classifications. Give an example of different types of institutions that operate within a classification were appropriate.

• Depository financial institutions—they attract savings from depositors and investors and provide loans to borrowers. Examples: commercial banks, building societies and credit unions. • Contractual savings institutions—there liabilities (sources of funds) are contracts that generate periodic cash flows, such as insurance contracts and superannuation savings. Their accumulated funds are used to purchase both real and financial assets—includes insurance offices and superannuation funds. • Finance companies—mainly provide loans to small business and retail customers. Also provide lease finance. No depositors; therefore, they borrow funds in the markets to finance their activities. • Investment