C5 - UK Financial System & Liquidity

Question 1

What is liquidity

Answer 1

The availability of cash or assets to finance short term debts as they fall due

Question 2

What doing it mean to be insolvent?

Answer 2

When a company can no longer pay debts as they fall due

Question 3

What does liquidity management involve?

Answer 3

• management of cash inflows and outflows
• arrangement of finance at the best terms obtainable
• appropriate investment of any cash

Question 4

What is a treasury department?

Answer 4

Someone who manages the money and financial risks of the company.

Question 5

Two types of laws that have an impact on borrowing/investing?

Answer 5

1) bribery act

2) money laundering act

Question 6

4 offences connected to bribery

Answer 6

1) offering, promising or giving of a bribe
2) requesting, agreeing to receive or accepting a bribe
3) bribery of a foreign public official
4) failing to prevent bribery

Question 7

What is money laundering?

Answer 7

Exchanging money or assets that were obtained criminally for money or assets that are clean and don’t have obvious links to any criminal activity.

Question 8

What is Financial intermediaries

Answer 8

A bank that holds funds from customers in order to make loans to borrowers

Question 9

Types of banks:

Answer 9

1) retail banks - NatWest, Lloyds and Halifax

2) merchant/investment banks - deals with major companies

Question 10

What is the Bank of England (BoE)

Answer 10

The UKs central bank carrying out the following functions:

• a banker to the government
• a banker to other banks
• responsibility for note printing, gold and foreign currency
• helps to influence interest rates in the economy

Question 11

What is the Interbank Market?

Answer 11

Banks and other large companies lending to each other on an unsecured basis over short periods. E.g. overnight, one month or six months.

Question 12

What are secured money markets?

Answer 12

Banks and other large companies that issue a variety of IOU certificates or securities issues by government or commercial banks.

Question 13

When a certificate is sold, does the new buyer receive the face value or the mature value which includes interest?

Answer 13

Face value at all times.

Question 14

What are treasury bills?

Answer 14

91 day certificate issued to provide short term government funding

Question 15

What are gilts?

Answer 15

Certificates issued for long term financing in return for money borrowed by the government.

Question 16

What are certificates of deposits?

Answer 16

Short term certificates issued by the banks for deposits received.

Question 17

What is a bill of exchange?

Answer 17

A document which sets out the amount and payment date of a debt. This can be sold at a discount before the due date so that the person who recently purchased it will receive the money on the due date.

Question 18

Assets and liabilities of a bank?

Answer 18

Assets:
Loans
Investments

Liabilities:
Customer deposits
Capital and reserves

Question 19

What is the Monetary Policy?

Answer 19

This involves the control of the money supply in the economy which in turn affects the rate of inflation

Question 20

What is fiscal policy?

Answer 20

How much the government spend and how it applies taxes to help control the economy.

Question 21

What is the purpose on the Monetary Policy?

Answer 21

Maintain price stability

Stability of employment rates

Achieved economic growth measured by Gross Domestic Product

Avoid recessions

Question 22

What is Gross Domestic Product?

Answer 22

A market value of goods and services produced by a country over a given period of time

Question 23

What is a recession in business terms?

Answer 23

A recession is the situation in which GDP has fallen over two successive quarters

Question 24

If Gross Domestic Product is high does this mean the Monetary Policy is working or no?

Answer 24

Yes.

Question 25

What is a bank rate?

Answer 25

An interest rate which is set by the Monetary Control Committee and is he rate which sets the pattern for commercial bank lending rates

Question 26

How what a treasury departments job entail?

Answer 26

Making sure a company has sufficient capital

Deciding how and where to borrow or invest money whilst managing the risks