4.4 Financial markets Flashcards
what is the formula for a bond yield
coupon value/market value
Name the 5 roles of financial markets
a) To facilitate saving
b) To lend to individuals and businesses
c) To facilitate the exchange of goods and services
d) To provide forward markets in currencies and commodities
e) To provide a market for equities
Define financial market
Where buyers and sellers can buy and trade a range of services or assets that are fundamentally monetary in nature
Define a product market
= markets where goods and services are bought and sold e.g. cars
Define a factor market
markets where factors of production are bought and sold e.g. labour
Name the 6 types of financial market
Capital
Money
FOREX
Derivatives
Commodity
Insurance
How do financial markets provide stability
Futures contract creates certainty which means more investment
Formula for credit creation multiplier
1/cash ratio
Define bond
Where debt is bought from government so they can spend on investment
Name 5 examples of market failure in the financial sector
o Asymmetric information
o Externalities
o Moral hazard
o Speculation and market bubbles
o Market rigging
How does asymmetric information occur in the financial market? (2)
Buyer knows more than seller about their habits - means insurers charge high price to everyone
PPI misselling
Name an example of negative externalities occuring in the financial markets
Lehman Brothers 2008 crisis - took on lots of external debt and so crashed the world economy because of their risk
Name an example of moral hazard in financial markets
Lehman brothers - thought bank was ‘too big to fail’ so took risk
Name an example of market rigging in the UK
Barclays and LIBOR - under-reported bank rate, which made bank look stronger and so increased profit
Name the two main controls central banks use to control monetary policy
Bank rate
Money supply
