12.1 The Structure Of Financial Market And Financial Assets

Question 1

What are assets?

Answer 1

Things which people or organisations own

Question 2

What are liabilities

Answer 2

Things which organisations and individuals owe

Question 3

What is a loan that a commercial bank gives out

Answer 3

An interest-earning asset which the borrower is liable to pay

Question 4

What does creating a loan simultaneously do?

Answer 4

Creates a bank deposit owned by the person who has to pay

Question 5

The bank deposit is….

Answer 5

Consumers asset but banks liability

Question 6

What is the role of the commercial bank

Answer 6

Honour cash withdrawals and cheques and debit card payments drawn on the deposit which transfers ownership of part of the deposit to other people.

Key point to remember is the loan creating process increases the banks assets (credit it receives) and its liabilities (consumers deposits) by equal amounts

Question 7

What is money

Answer 7

Primary medium of exchange or means of payments but also a store of value

Question 8

Money functions as what (2)

Answer 8

-medium of exchange or means of payment
-store of value or store or wealth

Question 9

What is a medium exchange or means of payment(function of money)

Answer 9

Most goods and derives exchanged via mowing rather than bartering

Whenever money is used to pay for goods and services or payment of debts it performs its function

Question 10

Money as a store of value or store of wealth(2)

Answer 10

Money is an asset

People store wealth in financial assets such as stocks and shares or physical assets like a car

Moneys purchasing power transferred to the future although inflation can erode its power

Question 11

Diagram for barter and different forms of money

Answer 11

Question 12

What is representing money

Answer 12

Items like gold and silver than have a certain value or bank notes

Question 13

What is token money

Answer 13

Two main forms cash and bank deposits e.g BOE has a monopoly over distribution of cash

Most modern money is in bank deposits

Question 14

What are the two less important value of money

Answer 14

A measure of value
A standard of deferred payment

Combined together called the unit if account function

Allows is to compare value of goods even when we don’t want to buy

Question 15

What is the money supply

Answer 15

The stock of financial assets which function as money

Question 16

When did monetarism replace Keynesiansm

Answer 16

1970s

Question 17

What is narrow money?

Answer 17

The part of the stock of mount (or money supply) made up of cash and liquid bank and building society deposits

Question 18

What is Broad money

Answer 18

Part of the stock of money made up of cash other liquid assets such as bank and building society deposits but also some liquid assets,

(the measurement of Broad money used used by the BOE is called M4)

Question 19

What is liquidity

Answer 19

Measures the ease with which an asset can be converted to cash without a loss of value

(Cash is the most liquid of all assets)

Question 20

Difference between narrow and broad money

Answer 20

Narrow money restricts the measurement of money to cash and bank and building societies ect

Broad money includes other financial assets which are too illiquid at least for the time being

Question 21

What led to the decline of monetarism as a major force in influencing UK govs

Answer 21

Goodhart’s law

Question 22

What Is goodharts law

Answer 22

As good as a gov tries to control the growth of a particular measure of the money supply

The more successful the BOE is in controlling rate of growth of financial assets defined as money supply-more likely it is that other financial assets will take on the function as the medium exchange and become money

Question 23

What is equity

Answer 23

The assets people own

Question 24

What is debt

Answer 24

People’s financial liabilities or money they owe

Question 25

What are bonds?

Answer 25

Financial securities sold by companies (corporate bonds) or govs (government bonds) which are a form of long term borrowing.

Bonds usually have a maturity date in which they are redeemed -borrower makes a fixed interest payment each year until the bond matures

Question 26

What are shares?

Answer 26

Updated financial assets sold by a company to raise financial capital. Shares sold by public companies are marketable on a stock exchange but shares sold by private companies are not marketable unlike a loan, a share signifies that the holder owns part of the enterprise

Question 27

Diagram for a portfolio

Answer 27

Question 28

What does a portfolio decision essentially do?

Answer 28

Distinction between physical and Financial assets and arranges financial assets according to liquidity and profitability

Question 29

What are financial markets?

Answer 29

Markets in which financial assets or securities are traded

Question 30

What are capital markets?

Answer 30

Where securities such as shares and bonds are issued to raise medium-to long-term financing , and where shares and bonds are traded second hand part of the market e.g London stock exchange

Question 31

What are foreign exchange markets?

Answer 31

Global decentralised markets for the trading of currencies. The main participants in this market are large international commercial banks. Collectively, foreign exchange markets are the largest markets in the global economy

Question 32

What are money markets?

Answer 32

Provides a means for lenders and borrowers to satisfy their short-term financial needs. Assets that are brought and sold on money markets are short term, with maturities ranging from a day to a year, and are normally easily convertible to cash

(Money markets is an umbrella term that covers several markets including the market for Treasury bills and commercial bills)

Question 33

What do Money market mechanisms do for banks?

Answer 33

Arrange their assets in terms of liquidity or profitability.

Question 34

What is the best example of a capital market

Answer 34

London stock exchange

Question 35

What is mainly traded in capital markets?

Answer 35

Shares
Corporate bonds
Gov bonds

Question 36

What are corporate bonds?

Answer 36

Debt security issued by a company and sold as new issues to people who lend long-term to the company. They can usually be resold second hand on a stock exchange

Question 37

What are gov bonds?

Answer 37

Debt security, in the UK known as gilt-edged securities or gilts, issued by a gov and sold as new issues to people who lend long term to the gov. They can be resold second hand on a stock exchange

Question 38

Diagram for a UK bond(don’t need to remember this just showing how it’s different to interest rates)

Answer 38

Question 39

What is a coupon?

Answer 39

The guaranteed fixed annual interest payment, often divided into two six month payments paid by the issue of a bond to the owner of the bond

Question 40

What is a maturity date?

Answer 40

The date on which the issuer of a date security(such as a gilt edged security (long-dated) or treasury bill(short dates)) pays the face value or the security to the security’s owner

Question 41

What is a bonds long run rate of interest essentially decided by?

Answer 41

The coupon and fixed price of the bond

Question 42

Equation for yield

Answer 42

Annual coupon repayment/gilts current market price

Question 43

For a bond with many years to go until maturity what other factor affects changes in its market price?

Answer 43

Expectation of marking a capital gain

Question 44

What are the two parts of capital markets?

Answer 44

New-issues markets
Second-hand markets

(In UK London stock exchange is the primary second hand market)

Question 45

Little diagram for explain the role of costal markets in financing and investment in British industry

Answer 45

Question 46

Capital market: primary market -what takes place

Answer 46

Reasoning of new capital or long-term financing

Question 47

What happens to a company when it sells bonds

Answer 47

Extends it debt and the purchaser of the bond becomes the creditor of the company

Question 48

Without second hand markets it would be impossible to…

Answer 48

Sell shares