12.1 The Structure Of Financial Market And Financial Assets Flashcards
What are assets?
Things which people or organisations own
What are liabilities
Things which organisations and individuals owe
What is a loan that a commercial bank gives out
An interest-earning asset which the borrower is liable to pay
What does creating a loan simultaneously do?
Creates a bank deposit owned by the person who has to pay
The bank deposit is….
Consumers asset but banks liability
What is the role of the commercial bank
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
What is money
Primary medium of exchange or means of payments but also a store of value
Money functions as what (2)
-medium of exchange or means of payment
-store of value or store or wealth
What is a medium exchange or means of payment(function of money)
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
Money as a store of value or store of wealth(2)
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
Diagram for barter and different forms of money
What is representing money
Items like gold and silver than have a certain value or bank notes
What is token money
Two main forms cash and bank deposits e.g BOE has a monopoly over distribution of cash
Most modern money is in bank deposits
What are the two less important value of money
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
What is the money supply
The stock of financial assets which function as money
When did monetarism replace Keynesiansm
1970s
What is narrow money?
The part of the stock of mount (or money supply) made up of cash and liquid bank and building society deposits
What is Broad money
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)
What is liquidity
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)
Difference between narrow and broad money
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
What led to the decline of monetarism as a major force in influencing UK govs
Goodhart’s law
What Is goodharts law
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
What is equity
The assets people own
What is debt
People’s financial liabilities or money they owe
What are bonds?
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
What are shares?
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
Diagram for a portfolio
What does a portfolio decision essentially do?
Distinction between physical and Financial assets and arranges financial assets according to liquidity and profitability
What are financial markets?
Markets in which financial assets or securities are traded
What are capital markets?
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
What are foreign exchange markets?
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
What are money markets?
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)
What do Money market mechanisms do for banks?
Arrange their assets in terms of liquidity or profitability.
What is the best example of a capital market
London stock exchange
What is mainly traded in capital markets?
Shares
Corporate bonds
Gov bonds
What are corporate bonds?
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
What are gov bonds?
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
Diagram for a UK bond(don’t need to remember this just showing how it’s different to interest rates)
What is a coupon?
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
What is a maturity date?
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
What is a bonds long run rate of interest essentially decided by?
The coupon and fixed price of the bond
Equation for yield
Annual coupon repayment/gilts current market price
For a bond with many years to go until maturity what other factor affects changes in its market price?
Expectation of marking a capital gain
What are the two parts of capital markets?
New-issues markets
Second-hand markets
(In UK London stock exchange is the primary second hand market)
Little diagram for explain the role of costal markets in financing and investment in British industry
Capital market: primary market -what takes place
Reasoning of new capital or long-term financing
What happens to a company when it sells bonds
Extends it debt and the purchaser of the bond becomes the creditor of the company
Without second hand markets it would be impossible to…
Sell shares
