Chapter 1 Flashcards
What are the 4 essential functions of Financial Services?
Protect savings and channel into capital management, providing means for savers to have ready access to their capital which matches borrowers requirements for long time funds, individuals and companies insure against risks they don’t want to take but others are willing to and disperse risk across a number of different investment products.
What were banks and building societies created for?
Keep monies safe and readily available.
How do banks and building societies make money?
Charging interest on loans.
What are building societies?
They are similar to banks but are ‘mutually owned’ meaning they are owned by individuals who have share accounts with them. There are no shareholders to pay dividends to. More money available for distribution to account holders in form of interest and means they can charge less interest on money it lends.
How do the Government fund its borrowing?
Uses the savings of private individuals. Acting as a financial institution in its own right. Issuing fixed term investments via the UK Debt Management Office.
How do Government fixed term agreements work?
Pay fixed level of interest at regular intervals over a fixed period of time. These are an investment to individual buying them. They get capital at end of term. During time of investment this is working as a loan to the Gov.
What is a Gilt?
Most well known type of Gov fixed term agreement. Cover the majority of UK debt. Promise to pay a fixed interest rate every 6 months and when it matures its holder gets paid back nominal value of investment e.g. what its worth at maturity.
How long does Gov borrow money for?
5, 10 or 30 years.
What are Gilts linked to to protect effect of inflation and what is this known as?
Retail Price Index - index linking. Also other measures are used - the RPI is no longer used as a benchmark and will be moving to Customer Prices Index including Housing to index-link Gilts but not until 2030.
What is quantitative easing?
When the Gov buy back Gilts. This increases liquidity, reduces interest rates and increase inflation. Helping the Gov meet inflation targets.
What is done when the Government wants to INCREASE inflation?
Quantitative Easing - Government buying back Gilts or bonds. Reduces interest rates meaning more spending and increased inflation.
What is done when the Government wants to REDUCE inflation?
Increase interest rates meaning less spending and borrowing e.g. mortgages will have really high interest rates may put people off reducing inflation.
What is National Saving and Investments (NS&I)?
Another type of Government financial institution known as Premium Bonds. Savings and deposits into this are used for Government funding.
What can individuals and companies have protection needs on?
- Physical assets
- Earnings
- Profit potential
- Financial transactions
What is insurance?
A risk transfer - in return for payment by policyholder the insurance company takes over the risk.
What are capital markets 2 key objectives? (Capital market is where funds are exchanged between suppliers).
- Allows to invest in assets that provide potential for real growth
- Help companies raise money without having to borrow from a bank
What are the 2 types of financial instrument?
Shares and bonds (fixed interest stocks)
What is a share?
Buying ownership of a % of a company and receive a portion of distributed profits in form of dividend.
What is a bond / fixed interest stock?
Private investor or corporations lending a company money, subject to terms, in exchange for an interest payment.
What makes up the UK Financial Services Structure?
- Financial infrastructure e.g. payment systems
- Financial markets e.g. on-exchange and over the counter
- Financial firms e.g. banks
- Financial sector authorities e.g. Bank of England
What are the Payment Systems Regulator objectives? (3 points)
- Make sure they operate in a way that considers interests of those using them
- Promote effective competition in payment system market
- Promote development of innovation
What type of financial market do member firms use?
On-exchange
What is an on-exchange financial market?
Trade that is taking place directly on the order book of an exchange e.g. on a trading floor by broker. Centralised. Can be electronic of physical.
What is over the counter market?
Non-centr
