8.1 The structure of financial markets and financial assets Flashcards
What is monetary policy?
The manipulation of the rate of interest, the money supply and exchange rates to influence the level of economic activity
What are the four functions of money?
- Medium of exchange or means of payment
- A store of wealth or value
- Measure of value
- Standard of deferred payment
To act as money what features does the medium of exchange have to have?
Acceptable Durable Portable Divisible Scarce Difficult to forge
What is narrow money? (M0)
Approximate amount of cash in circulation
What is broad money? (M4)
Includes savings and less liquid assets as well as coins, notes and money in circulation
What is fisher’s equation?
MV=PT M = money supply V = velocity of circulation P = price level T = transactions
What is the money market?
The money market provides short term finance, to individuals, firms and government. This market mainly deals with short term debts (typically 24 hours to 12 months)
What is the capital market?
The capital market provides medium term finance, to firms and government. This market mainly deals with raising finance from companies issuing shares, corporate bonds and governments issuing bonds to finance their requirements.
What two components is the capital market split into?
Primary market - deals with the issues of new securities (bonds and shares) by firms or government to raise finance
Secondary market - deals with the trade in bonds and shares that have already been issued. World stock markets are largely dealing with this market (buying/selling existing shares)
What is the foreign exchange market?
The foreign exchange market (forex, FX or currency markets) is where different currencies are bought and sold as international trade and investment necessitates the conversion on one currency to another.
What two components is the foreign exchange market split into?
Spot market - involves the immediate exchange of foreign currency
Forward market - involves the exchange of foreign currency at some specified time in the future, usually to dod iwht fluctuations and speculation
What are government bonds?
Governments often run budget deficits and issue bonds to finance the shortfall. The stock of bonds yet to be repaid represent the national debt.
What is the difference between debt and equity?
Debt:
Money that has to be paid back with interest
Equity:
Giving the provider of funds to a business an ownership stake and a share of future profits (capital gains)
What is a coupon?
The guaranteed amount of interest paid to the bondholder expressed as a percentage of the face value of the bond
What is the yield?
The income return on an investment and is the amount of interest paid on the bond expressed as a percentage of the current market price
