4.4.1 Role of Financial Market

Question 1

What is a Financial Market

Answer 1

where buyers + sellers can trade Financial assets

They work as an ‘intermediate’ between lenders and borrowers

i.e bond market, stock market

Question 2

Who might be a lender in a Financial Market

Answer 2

Savers

Investors

Question 3

Who might be a borrower in a financial market

Answer 3

individuals i.e. mortgages

firms i.e. investment spending

Governments i.e. welfare spending

Question 4

What are commercial banks

Answer 4

Gives rates of return on savings and will give loans to borrowers with interest

They make revenue through charging more interest on loans than the returns on savings

Question 5

What is an Investment banks

Answer 5

An investment bank provides specialized services for companies and large investors:

• Underwriting and advising on securities issues and other forms of capital raising
• Advice on mergers, acquisitions & corporate restructuring
• Trading on capital markets (bonds and equities)
• Corporate research and private equity investments

Question 6

What are Pension funds

Answer 6

large sums of money often invested in the stock market

Question 7

What is the Money Market

Answer 7

market for short-term finance for businesses/households

Includes inter-bank lending i.e. commercial banks providing liquidity for another

Question 8

What is LIBOR

Answer 8

London Inter-Bank Offered Rate

is the rate at which the commercial banks are prepared to lend to each other when the bank is short of liquidity

The interest rate tends to be pretty low

Question 9

What is the Capital Market

Answer 9

markets where securities such are shares and bonds are issued to raise medium to long-term finance for a business + Government

Question 10

What is the Foreign exchange market

Answer 10

Markets where currencies (foreign exchange) are traded

Gains or losses are made from exchange rates – speculative activity in the currency market is often
high

Question 11

in 2018, how much did the financial sector contribute to the UK’s economy

Answer 11

£132 Billion

Question 12

Explain the 6 key roles of the financial market

Answer 12

1. Facilitate savings by businesses and households - where money can gain interest
2. Lend to businesses/individuals - intermediary between savers and borrowers
3. Allocate funds to productive uses - allocate capital to risk-adjusted rate is highest
4. Facilitate final exchange of goods + services such as contactless payment/foreign exchange
5. Provide a forward market in currencies + commodities - allows agents to insure against price volatility
6. Provide a market for equities - allowing businesses to raise fresh equity to fund capital investment/expansion