Question

(a) Discuss how investment banks operate, how they function in our financial system, and how they earn money and the importance of investment bank’s reputation to its survival.

(b) Explain how Reserve Bank of Australia (RBA) retain control of interest rates. Explain which of the methods are more suitable in the current COVID-19 capital market.

Answer 1

Investment banks offers funding and advice to clients, corporate and investors, trade, buy and sell of service,commodities and financial product to earn money for themselves and their customers. Modern days have see banks called Universal Banks that includes both retail and simple investment banking.

HOW DO THEY OPERATE?

Investment banks are best nown or their work as intermediaries between a corporation and financial markets.That is, they help corporations issue sharesof stock in an IPOs or additional stock offering. They also arrange debt finance for corporations for finding large scale investors.

The investment bankers advisory role begins with pre underwiting counselling and continues after the distibution of secuities.

(a)

They are responsible for examining a company financial statments for accuracy and publishing a prospectus that descibes the offering in details to investors before the secuites are available for puchase.

HOW DO THEY FUNCTION IN OUR FINANCIAL SYSTEM?

• ADVISORY :- Clients Are advised regarding selling, buying and ipos of companies, raising money and the maintain of financial affairs, trading of financials product and economy risk manage.
• MANAGEMENT OF INVESTMENTS:- Both individuals and competeters are advice on investment managing.
• PROVIDING LOANS AND FRANCHISING.
• TRADING :- Trading of shares, debts, derivatives, commodities etc to earn brokerage.
• MONITORING & RESEARCH:- Industry trends,economy development, investment patterns, etc. for client and self.

HOW THEY EARN MONEY?

Investment banks earn money by offering the financial services to clients and earn income like-

• FEES:- advisory charges, finance and short term funds for providing loans, keeping money safe for clients, trading service, financing and arranging funds and investment. serices generates fees.
• DIVIDENDS:- shares provide returns on investments.
• INTREST:- loan generates intrest as income.
• INVESTMENT:- brokerage and profit from investment..
• TRADING:- profit and brokerage made from selling and buying of securities.

(b)

Resrve ban o Australia retentiõn control of interest rate:-

• standard facility demand orienated facility at the initiative of commercial banks. It consist of rediscounting of bill of exchange, security purchase deals and lombard loans.
• Minimum reserve:- it is an important instrument to stabilize money market rate flactutation and to create enlarge money market liquidity shortage i.e, stability of money flow.
• Volatility in the money market:- the OeNB has been very successful in minimizing flactuations o the overnight rate.This has increased the maket efficiency and retain the central bank signalling capacity.

SUITABLE Or COvID SITUATION

The austalian dollar has surged 25%since a marcj as key commodity prices strengthened and the nation managed to contain the virus and reopen its economy earlier than expected.