banking lecture 1

Question 1

what is money market ?

capital market

Answer 1

moeny market :where short term instruments are traded

capital market : medium and long term instruments

Question 2

primary market and secondary market ?

Answer 2

primary : is where securities are issued

secondary : where securities are traded ( stocks)

Question 3

bond market and stock market

Answer 3

bond : fixed income

stock : creditor and owners of stock

Question 4

official exchange and over the counter

Answer 4

official exchange : futures and options

OVT : FORWARDS

Question 5

function of financial market

Answer 5

transfer of funds
accumulation ( build wealth)
risk sharing
liquidity ( sell financial assets)
pricing ( provide price of FA)
Aggregation of information 
efficiency ( reduce transaction cost)

Question 6

what financial markets do?

Answer 6

FM are promises

Question 7

asymetric information?

what it leads?

Answer 7

the one making the promise knows more than one buying

leads to:
adverse selection
moral hazards

Question 8

allocation of funds ?

Answer 8

direct financing
semi direct financing (broker)
indirect financing (banks)

Question 9

why banks are important ( function of banks)

Answer 9

asset transformation
solve information problem because the cost of producing information is lower per unit ( economy of scale)
supplier of liquidity
maturity transformation
allocation of credits

Question 10

bank balance sheet

Answer 10

assets vs equity liabilities

assets: fixed assets/bonds/stocks/loans/ derivatives /cash

equity and liabilities: equity/ deposits (money of people) / short and long term debt

Question 11

how is money created?

Answer 11

in modern economy banks deposits are mostly created by commercial banks
commercial banks create money, in the form of bank deposits by making new loans

Question 12

evolution of money

Answer 12

1. survival economy ( fisher eat fish)
2. trade ( fisher trade for fruit)
3. need for IOU ( fisher want to eat corn today but farmer want to eat fish tomorrow)
4. the rise of money ( complex IOU)

Question 13

how deposits created and how destroyed ?

Answer 13

deposits created : when people bring money ( coins and notes ) to the bank and put in their account

deposits destroyed: people exchange the amount in account to notes and coins
and when loans are repaid

Question 14

what are central bank reserves?

Answer 14

commercial banks have to settle transactions between each other . this can be done through the central bank reserve.

reserves for commercial banks are the same as money for regular people

these are assets

Question 15

what is money creation quantitative easing?

Answer 15

central bank buys assets on secondary market

ECB would buy government bonds and pay for these bonds by issuing more reserves and gives it to a commercial bank .

the commercial bank will try to balance assets and liabilities so he buys the governmental bonds to ECB .