25556 The Financial System

How 25556 is assessed

The 30%, 20% and 50% weights and the quiz and exam lengths come from the UTS Handbook 2024 entry for this subject; the 2026 handbook page lists the subject without assessment weights. The Spring 2026 Canvas pages match it for the two tasks they describe: the quiz is set at 30 points over 60 minutes and the group assignment is worth 20% of the final grade. The 2024 entry also states that students must achieve at least 50% of the subject's total marks. The subject outline on Canvas is the authoritative source for the 2026 exam details.

Current 25556 dates

Dates are as published in the Spring 2026 subject schedule, quiz page and group assignment page on Canvas. Confirm exact deadlines and submission settings in the live LMS.

What 25556 covers

The subject builds from the functions of the financial system through direct and indirect financing to the fixed-income markets and shares. This guide follows Topics 1 to 7 in teaching order, splitting each topic into the chapters its lecture and workshop parts support.

Its official description centres on three functions: settling payments, channelling funds from savers to borrowers, and transferring market risk. The first half of the semester builds that picture from the ground up.

Topic 1 sets out the functions, the institutions, markets and regulators of the Australian system, and the core finance ideas of leverage, yield, liquidity, risk and the time value of money, with the global financial crisis as a cautionary case. Topic 2 separates direct financing through securities markets from indirect financing through banks, and looks at how prices behave once securities trade.

Topic 3 turns to authorised deposit-taking institutions, how they fund themselves and how they lend. Topics 4 to 6 form a fixed-income block: money market securities such as bank-accepted bills and negotiable certificates of deposit, bond pricing and holding period returns, the term structure of interest rates and hedging with forward rate agreements. Topic 7 covers shares, initial public offerings and raising extra equity.

The later weeks move to equity markets, funds management and superannuation, forwards and futures, options and foreign exchange. Each week combines a pre-recorded lecture, two-hour workshops that apply the ideas through calculations and real-world examples, and a one-hour tutorial where students discuss prepared answers.

The subject is quantitative throughout: yields, discount-security prices, loan repayments and bond prices recur across the quiz practice set, the workshops and the tutorials, so the guide treats every formula as something to practise by hand rather than memorise.

Worked example · free

Find the EBIT at which borrowing stops lifting return on equity

Key terms

Surplus unit

A household, firm or government with more funds than it currently needs, which supplies them to others for a return.

Deficit unit

A borrower or issuer whose spending plans exceed its own funds, such as a home buyer or a company raising capital.

Direct financing

Raising funds by selling securities such as bonds or shares straight to investors through the financial markets.

Intermediation

Indirect financing in which an institution takes in deposits and relends the pooled funds as loans.

Information asymmetry

A gap in knowledge between two parties to a financial contract that can leave the less informed side worse off.

Moral hazard

The temptation for one party to act in its own interest at the expense of someone to whom it owes a duty of care.

Market risk

Exposure to loss when an interest rate, a currency value or a share price moves by surprise.

Bank-accepted bill

A short-term discount security drawn by a borrower and accepted by a bank, which takes on the borrower's credit risk.

Negotiable certificate of deposit

A tradeable short-term deposit security issued by a bank and sold at a discount to its face value.

Cash rate

The interest rate on overnight loans between banks, which the Reserve Bank targets to carry out monetary policy.

Yield to maturity

The annual return an investor earns by buying a bond at today's price and holding it until it repays its face value.

Forward rate agreement

An over-the-counter contract that fixes an interest rate for a future period and settles the difference in cash.

Initial public offering

A company's first sale of shares to the public, usually paired with a listing on the stock exchange.

25556 FAQ

Questions students ask in each 25556 chapter

What are the five functions of the financial system?

They are settlement of payments, the movement of funds from surplus units to deficit units, risk transfer, promoting efficiency and stability. Learn each with an example: a card payment for settlement, a home loan for the flow of funds, a fuel or currency hedge for risk transfer, disclosure rules for efficiency and emergency central bank lending for stability. Chapter 01 · Functions of the Financial System

What is the difference between APRA and ASIC?

APRA is the prudential regulator: it checks that banks, insurers and superannuation trustees stay sound enough to honour their obligations. ASIC regulates conduct, enforcing company and financial services law so that consumers, investors and creditors are treated fairly and given proper disclosure. A capital requirement points to APRA; a misleading product statement points to ASIC. Chapter 02 · Australian Institutions, Markets and Regulators

Why does leverage increase return on equity?

Debt usually costs less than the return the firm earns on its assets, so profit left after paying interest is spread over a smaller equity base. That lifts return on equity when earnings are healthy. The same arithmetic works in reverse: when earnings fall below the cost of the debt, the levered firm's owners lose more than an all-equity firm's would. Chapter 03 · Leverage, Yield, Liquidity and Time Value of Money

How does the primary market differ from the secondary market?

The primary market is where new securities are sold for the first time, so the issuer receives the money. The secondary market is where investors later trade those securities with each other; the issuer receives nothing from those trades, but an active secondary market makes investors more willing to buy the next issue. Chapter 04 · Direct Financing in Primary and Secondary Markets

What are the three forms of market efficiency?

Weak-form efficiency means prices already contain the information in past prices. Semi-strong efficiency adds all public information, so only private inside information could still give an edge. Strong-form efficiency means prices contain every price-sensitive fact, so no kind of information can be used to earn returns above those that the risk taken justifies. Chapter 05 · Market Prices, Volatility and Market Risk

What does a bank transform when it intermediates?

It pools many small deposits into a few large loans, lends money that savers can reclaim quickly for long periods, the credit risk of borrowers into a risk depositors will accept, and the returns depositors want into borrowing costs borrowers will pay. These four transformations are the benefit of intermediation; the interest margin and fees are its cost. Chapter 06 · Intermediation and Bank Funding

How do you calculate the repayment on a housing loan?

Treat the repayments as an annuity. Divide the loan amount by the present value annuity factor, which is one minus one plus the periodic rate raised to minus the number of payments, all divided by the periodic rate. For monthly repayments use the annual rate divided by twelve and the term in years times twelve. Chapter 07 · Bank Lending and Loan Repayments

Why is a bank-accepted bill not a source of funds for the bank?

The bank only guarantees the bill. It can sell the accepted bill to investors in the money market, so the company's cash comes from those investors while the bank earns a fee for lending its name and carries the company's credit risk. Chapter 08 · Money Market Securities and Dealer Trading

Why does a money market investment held to maturity have no price risk?

At maturity the issuer pays the face value regardless of what market yields have done, so the purchase yield is locked in. Price risk only appears when the security must be sold early, because the selling price then depends on the yield prevailing on that day. Chapter 09 · Money Market Yields and the Cash Rate

Why do bond prices fall when market yields rise?

A bond's coupons and face value are fixed, so its price is their present value at the current yield. Discounting the same payments at a higher rate gives a smaller present value, so the price falls; a lower yield does the opposite. Chapter 10 · Bond Market Segments and Bond Pricing

What are the three sources of return on a bond investment?

An investor receives the coupons, earns interest by reinvesting each coupon until the end of the holding period, and finally receives either the face value at maturity or the sale price if the bond is sold early. A single annual rate, the holding period yield, combines all three, and it is the figure to compare with the purchase yield. Chapter 11 · Bond Investment Returns and Long-Term Yields

What does an inverse yield curve tell you?

Long-term yields are below short-term yields, and under the expectations view this means the market expects short-term rates to be lower in future, often because it anticipates cuts to the cash rate. Name the shape first, then state the expectation it reveals and, if asked, a plausible economic reason such as a slowing economy. Chapter 12 · Term Structure and Yield Curve Theories

What does 1:4 mean on a forward rate agreement?

The numbers count months from today. A 1:4 FRA fixes a rate for the period that starts in one month and ends in four, so it covers a three-month, or 90-day, borrowing or investment. A 3:6 FRA would cover the same length of period starting three months from now. Chapter 13 · Hedging Interest Rate Risk with FRAs

What is the difference between ordinary and preference shares?

Ordinary shares give a residual claim on profits, full voting rights and unlimited potential for capital gains. Preference shares pay a promised dividend that ranks ahead of ordinary dividends but usually have restricted votes, and they may be cumulative, convertible or redeemable. Both represent ownership of the company. Chapter 14 · Equity Securities and Share Valuation

Why do companies go public?

A float can raise new equity to fund growth, let existing owners sell some or all of their holdings, or do both. Listing also strengthens the balance sheet, gives investors a liquid holding and widens the ways the company can reward staff, though it is costly and dilutes the continuing owners. Chapter 15 · IPOs and Raising Additional Equity

How to study for the exam

Work the subject in the weekly order it is taught: watch the recorded lecture, attempt the workshop questions, then complete the tutorial set before class, because each topic reuses the tools of the one before.

Keep one formula sheet that you write yourself, with the convention beside every formula: days over 365 for money market yields, semi-annual compounding and prices per $100 for bonds, monthly compounding for housing loans. Rework the workshop calculations from a blank page until you can explain every input, and practise rounding to two decimal places, which the quiz requires.

For the conceptual topics, write a two-sentence explanation of each function, institution and regulator in your own words, since the practice questions test fine distinctions such as market risk versus default risk. In the last fortnight, sit the quiz practice set under a 60-minute timer, then redo every bond question with a face value other than $100, the mistake the Topic 5 tutorial warns about.

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