4.2.4.1: Financial Markets And Assets Flashcards
What are some of the characteristics of money?
- A medium of exchange- transactions used to occur through bartering, where goods and services were traded with others, but people didn’t always get exactly what they wanted- it could only take place if there was a double coincidence of wants (both parties want what the other parties are offering). Money eliminates this problem.
- A measure of value (unit of account)- money provides a means to measure the relative values of different goods and services.
- A store of value- can be kept for a long time without expiring.
- a method of differed payment- money can allow for debts to be created. Means people can pay for things later.
What is money supply?
The stock of currency and liquid assets in an economy. It includes cash and money held in a savings account
What is narrow money?
Very liquidable money, physical currency (notes and coins), as well as deposits and liquid assets in the central bank
What is broad money?
Not very liquidable- includes the entire money supply, e.g. assets you own, loans, etc.)
What are money markets?
Market for short-term loan finance for businesses and households.
Includes inter-bank lending and short term government borrowing
Borrowed and lent normally for up to 12 months
What are capital markets?
Market for medium-longer term finance. Where equity and debt instruments (e.g. shares and bonds) are brought and sold. Government may issue medium-long term government bonds (e.g. 10-20 years)
What are currency markets?
Market where foreign currencies are traded, mainly by international banks. It determines what the relative value of different currencies will be (gains or losses are made from the movement of exchange rates)
What are the roles of financial markets in the wider economy?
- to facilitate saving (provide somewhere for consumers and firms to store their funds)
- to lend to businesses and individuals (the transfer of funds between agents is aided)
- the facilitate the exchange of goods and services (provide a way for buyers and sellers to interact and transfer funds)
- to provide a market for equities (shares) (equity/stock markets involve the trade of shares.)
What is debt?
Money which has been borrowed from a lender (usually a bank). There is little flexibility and the loan is later repaid with interest
What is equity?
A stock which represents interest in owning (e.g. a firm, a car or a house). It is when there is no outstanding debt, means it is fully paid off. The owners equity is then the car or house, which can be sold for cash. Selling shares of a business
Why is there an inverse relationship between market interest rates and bond prices?
When a bond is brought, money is lent to the issuer, who agrees to pay the value of the bond back when it matures as well as periodic interest payments. Rate of interest is fixed when the bond is issued.
