CGMA BA1 Fundamentals of Business Economics - The financial system: financial markets Flashcards
Why do financial intermediaries exist?
Financial intermediaries (e.g., banks/building societies) exist to connect those with surplus funds who want to invest with those who have a shortage of funds who want to borrow.
What is direct finance?
Direct finance involves no intermediary, meaning funds flow directly between investors and borrowers.
What is indirect finance?
Indirect finance involves an intermediary, such as a bank, facilitating the flow of funds between investors and borrowers.
What is the flow of funds?
The movement of money between savers, borrowers, and financial intermediaries in the economic system.
What is synchronisation in finance?
Synchronisation refers to balancing payments and receipts to maintain financial stability.
What are long-term loans, bonds, and debentures?
These are loans secured on the assets of a business, similar to a mortgage for individuals.
What is mezzanine finance?
Mezzanine finance combines debt and equity, allowing lenders to convert loans into shares if not repaid on time.
What is a budget surplus?
A budget surplus occurs when government revenues exceed expenditure.
What is a budget deficit?
A budget deficit occurs when government expenditure exceeds revenue, requiring financing.
What are clearing banks?
Also known as retail or high street banks (e.g., HSBC, LloydsTSB), they provide banking services by taking deposits and lending funds.
What are building societies?
Similar to clearing banks but traditionally mutual organisations, though many have converted to private companies.
What do pension funds do?
They use pension contributions to invest in financial assets such as equities and bonds.
What do venture capitalists do?
They finance high-risk ventures such as start-ups and management buyouts.
What are the advantages of using financial intermediaries?
risk management
aggregation
maturity transformation
borrower-lender matching.
How do financial intermediaries help with risk management?
They shield individual borrowers and savers from bad debt risk by taking on the risk themselves.
What is aggregation in financial intermediation?
It allows intermediaries to pool small investments and lend in larger packages, removing the need for exact matches between lenders and borrowers.
What is maturity transformation?
Financial intermediaries match investors’ short-term needs with borrowers’ long-term financing requirements.
How do financial intermediaries help
borrowers?
They provide funds to borrowers even in unfavorable market conditions, ensuring access to finance.
What are cash instruments?
Cash instruments (e.g., shares and bonds) have values determined directly by the market.
What are derivative instruments?
Derivative instruments (e.g., options, futures) derive their value from an underlying asset, such as share options.
How are bills of exchange used in international trade?
A lender (supplier) issues a bill with a specified amount and repayment date (typically 90 days), which the borrower (customer) signs as acceptance.
What happens if a lender does not want to wait 90 days for repayment on a bill of exchange?
The lender can sell the bill on the secondary market for slightly less than its face value.
What is a Certificate of Deposit (CD)?
A CD is a time deposit that is insured and virtually risk-free, typically with a fixed term and interest rate.
What are negotiable CDs?
Some CDs are issued in a negotiable form, meaning they can be actively traded on the secondary market before maturity.
