4.4.1 Role of Financial Markets Flashcards
LS13
1
Q
What are the roles of financial markets?
A
- To facilitate saving
- To lend to businesses and individuals
- To facilitate the exchange of goods and services
- To provide forward markets in currencies and commodities
- To provide a market for equities (shares and bonds)
2
Q
Financial markets definition?
A
- Any place where buyers and sellers meet to trade financial assets
3
Q
Forward/Futures market definition?
A
- When a buyer and seller can trade a financial asset at a future date, at a specified price
usually for trading currencies/commodities
4
Q
How do forward markets provide greater certainty to firms (that trade with other firms) and/or consumers that use a different currency
A
- Price of foreign currency is agreed upon so firms can budget and make decisions
- Prices are likely to be more stable for consumers
5
Q
Why does the rate of interest on saving and borrowing have to differ for commercial banking?
A
- Need the return paid to savers to be lower than the interest rate paid by borrowers in order to be profitable
6
Q
Why do financial markets allow for increased consumption in an economy?
A
- Provides credit and transaction services
7
Q
Why do companies rely on stock markets and bond markets to finance investment?
A
- Issuing bonds allows companies to raise large amounts of capital quickly
Useful for expansion, R+D
8
Q
Why do governments rely on bond markets to finance investment?
A
- When there’s a shortfall in tax revenue, bonds are helpful
