Funds Flow Through the Financial System from Surplus...

Why do entities choose the type of investment or source of funds that they do? Are there any other choices? Do these other choices exist? Why do they exist? Funds may travel from surplus entities to deficit entities, but why does this happen, and how. Surplus entities choose the type of investment to financially benefit themselves, as do deficit entities, choose the best finance of funds available to them with the lowest penalty. Not always is this choice available. Most of the types of investment and finance available has strict conditions, this is why these entities choose what is available to them. These funds may flow through primary and secondary markets. The finance may be debt or equity. Who really knows the best decision for the†¦show more content†¦On the other hand for a Business looking to obtain funds (deficit entity), this may be done by issuing shares in the business. This way, the business does not have to source funds in the debt market but can source funds i nternally. Surplus entities (lenders) include households, companies, the government and the rest of the world. Deficit entities (borrowers) includes households, companies the government and the rest of the world. Funds usually go through the matching principle, which means a short-term asset should be met with a short-term liability. Another of the ways to source fund is through the Debt market. Examples of Debt Markets include: Treasury bonds, notes, corporate debentures, Commercial bills, Promissory notes, Bank products, Securitised assets, and International debt. The advantage for a surplus entity in investing in the debt market is security. Banks are the most secure investment. The down side of this is the lower return to receive from this investment compared to equity markets. Deficit entities find the debt market the best to obtain fund from, as seen in the RBA Bulletin, commercial banks hold more than 49.1% of the total assets of financial institutions. Down sides? Of course. 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