Chapter 1 Flashcards
What must money have to be acceptable as a medium of exchange?
Sufficient in quantity
Generally accepted by all parties
Divisible into small units
Portable
What is the role of the Bank of England
Issuer of banknotes Banker to government Banker to banks Adviser to govern Manage gold and Fx reserves Lender of last resort
Why do institutions trade ok financial markets?
To reduce risk
What is the equity market
Companies raise money over the long term to finance long term investment in property equipment and product development
What are the money markets
They offer short term borrowing- interbank markets, treasury bills and commercial paper. They provide liquidity to institutions
What are capital markets?
Long term lending and borrowing- bond and equity markets which provides businesses and governments with long term funding for investment and projects
Why does it cost more for retail borrowers then wholesale?
There is an economy of scale. When lending large amounts the admin costs are lower in proportion to the amount of money involved. This reduces the the spread between lending and borrowing.
What is the difference between secured and unsecured loans.
Secured is backed with an asset of value. Unsecured is based on trust. Secured transactions in repo market, unsecured in interbank market. The risk of default is lower on secured so the rates are lower.
What is the primary and secondary market?
Primary raises new capital. For example issuing of new shares.
Secondary where existing securities are traded. The secondary market reduces risk in the primary market by offering a market where people can buy and sell shares.
What is the purpose thebfx market?
It allows companies to exchange currency for another when dealing with international customers and suppliers.
What is the repo market?
Is a sale and repurchase agreement usually based on gilts.
Who are the main participants in the gilt repo market
U.K. & Foreign banks Building societies Mutual funds Hedge funds overseas central banks
What is the interbank market?
It’s an unsecured market in which banks and other large financial institutions borrow and lend large wholesale sums for short period from overnight to 6 months
Why are treasury bills low risk?
Because the government are the borrower.
How is repo interest rate represented?
The interest rate is reflected in the difference between the sale and repurchase price.
What is the commercial paper emarket?
It brings together large companies that need short term unsecured borrowing and investors who want to offer short term loans.
The term is used for securities issued by companies for up to one year.
1-5 years are medium term notes
5 years plus are bonds
What are corporate bonds?
They are issued by companies that want to finance projects between 5-30 years. They must have good credit rating.
New issues are bought in the primary market. Once in existence they are traded on the secondary market.
Why are bonds?
They are Gilts or similar instruments with terms of over 5 years.
They are issued by governments, companies and local authorities.
What is an ipo?
It’s the first sale of shares to the public in a initial public offering.
What are the 3 main ways companies can issue new shares?
Prospectus issue
Private placement
Rights issue
What is the reinsurance market?
It’s a market where insurance companies package up risks they have accepted and sell bits to other insurers to balance the risk. It divides the risk up between insurers so a larger than usual claim is not just felt by the issuing insurer and the claim is split between all the insurers who bought parts of the risk.
Who are government gilts issued by?
The debt management office
