BUSINESS (Banking Systems/Central Bank)

Question 1

Credit score

Answer 1

-use it to evaluate your risk
-lower your score=more risk you are=higher interest rate you will pay
-use past credit to calculate it (ex. credit cards, lines of credit, loans, mortgage payments)
>payments
>how much you have
>how long you have had it

Question 2

Establish a credit rating

Answer 2

-pay your bills on time
-only borrow what you can afford
-start with one entry level credit card
-start slow (every time you apply for credit it is tracked as a hard hit)
-keep balances low

Question 3

Economic cycle

Answer 3

-expansion
-contraction (recession)
-business peak and recession trough

Question 4

Global financial system

Answer 4

-framework of agreements (treaties) and institutions (central banks) that facilitate the flow of capital for investing and trading

Question 5

Central banks (reserve banks)

Answer 5

-manage currency
-money supply and interest rates for each country
-oversea the commercial banking system
*the bank’s bank: lend money to commercial banks who in turn lend money to businesses and consumers

Question 6

Supply and demand economy

Answer 6

-Heading into a recession: banks increase supply of money=drops interest rates=more people take out loans to buy goods and services=stimulates economy
-inflation going up fast: raise interest=decrease supply of money=decrease the number of loans

Question 7

Currency

Answer 7

-money that is used in circulation such as banknotes and coins

Question 8

Interest

Answer 8

-the payment by a borrower to a lender above the principal sum
-“cost of money”

Question 9

Principal

Answer 9

-initial size of the loan

Question 10

Bond

Answer 10

-a contract between 2 parties
-investors buy the bond with the funds going to the issuer (government or company)
-“IOU” between the lender and the borrower
-fixed income investments because they pay at a set rate

Question 11

bond example

Answer 11

-governments and companies issue bonds when they need large sums of money

Question 12

Commercial banks

Answer 12

-provide services (deposits, loans, investment products)
-operate as a business
-5 main banks in Canada

Question 13

3 divisions of commercial banks

Answer 13

1. Retail banking
2. Commercial or wholesale banking
3. Investment banking

Question 14

Retail banking or consumer banking

Answer 14

-provided to general public vs. companies

Question 15

commercial or wholesale banking

Answer 15

-for large customers and corporations (mortgage brokers, corporations, real estate developers)
-commercial banking is an activity of a commercial bank

Question 16

investment banking

Answer 16

-division of banks that provides advice to individuals, corporations and governments
Ex. a company wants to raise money via. Initial public offering (IPO) would consult in investment bankers

Question 17

Central (reserve) banks

Answer 17

-Bank of Canada
-Governor of Canada
-controls Monetary Policy

Question 18

Monetary Policy

Answer 18

-central banks actions and communications used to manage supply of money
-specifically it “prints money” also known as QUANTITATVIE EASING
1. QE (not routine)
2. Overnight rate (set around 8 times a year)

Question 19

Quantitative easing

Answer 19

-how central banks manage supply of money
-printing money spurs borrowing and investing=ECONOMIC GROSTH
>print more money when they see a recession coming (ex. 2020)
*all about increasing liquidity
-follows supply and demand curve
>prints too much money=value of money goes down, which can lead to inflation, or hyperinflation
-not done on a routinely basis

Question 20

Quantitative easing steps

Answer 20

1. Central bank creates money
2. Central bank buys bonds from financial institutions
3. Reduces the interest rates (more money leads to decreased prices)
4. Leads to business and people borrowing more
5. They spend more and create jobs
6. Boost the economy

Question 21

Theory of quantitative easing

Answer 21

-put more money into the hands of banks so they can lend out more money to the consumers and corporations

Question 22

Fiscal Policy

Answer 22

-controlled by Ministry of Finance (government)

Question 23

Control money supply

Answer 23

-Central banks do that on a day-to-day basis by adjusting interest rates
>use the country’s rate of inflation as a barometer for the health of the economy

Question 24

Inflation

Answer 24

-measure of rate at which average price of basket of goods and services increase over time (consumer price index)

Question 25

Deflation

Answer 25

-dropping of consumer price index to below 0%
-signals that economy is shrinking or contracting
>lack of money supply (need for QE) or people aren’t buying goods
>lack of demand or oversupply of goods=dropping price
-associated with severe recessions

Question 26

Overnight rate

Answer 26

-interest rate that banks borrow and lend one day funds to each other
-only lent for one day

Question 27

Deposit and bank rate

Answer 27

-banks can deposit money with BOC at the deposit rate for one night or borrow at the bank rate for one night

Question 28

Target overnight rate set by BOC

Answer 28

-usually referred to as the Bank’s policy interest rate

Question 29

Prime rate

Answer 29

-each bank sets its own prime lending rate but 5 big banks in Canada invariably have the same prime rate
*when BOC changes overnight rate, then it is signalling which way it wants the prime rate to move
-what financial institutions base all their lending rates
*only the very best, credit worth clients can borrow money at the prime rate