Chapter 2 - Saving and Borrowing & Chapter 3 - Banking Flashcards
What is the role of a financial services industry
Links those with surplus money to those with a need to borrow money.
Includes markets to enable investors in equities and bonds or sell investments
Who are savers?
Savers have more money than they need. This means they have a surplus of money that they probable want to generate more money with.
What is the role of banks?
Banks and building societies don’t just sit on the money deposited with them. They use it to generate more money.
what is the correlation between risk and reward
Increasing risk = higher reward
What are equities also known as
-Stocks
-Shares
Shareholders are technically _____ ______ of a company.
Shareholders are technically part-owners of a company
How do shareholders make returns?
Through dividends and capital gains
What are bonds also known as
-Debt instruments
-Loan stocks
A bond is a ___ made by an _______ to a _______ or ________
A bond is a loan made by an investor to a company or government.
How do bond holders make returns
Bondholders make returns through interest paid on the bond. They can also be traded.
Rank these investments based on the risk return trade off, starting from lowest risk to highest risk.
-Cash in a bank account
-Casino roulette wheel
-Equities issues by a less-established company
-Equities issued by a large, well-established company
Cash in a bank account
Equities issued by a large, well-established company
Equities issued by a less-established company
Casino roulette wheel
Why are equities more risky than bonds
-Equities do not specify a percentage return that will be paid each year
-Equities do not have a set date by which they are repaid
-Shareholders are last in the queue to getting money back if something goes wrong in the business.
-Share prices are volatile.
Role of retail bank
-Take deposits and lend to the public
-Provide unsecured loans
-Provide secured mortgages
-Provide unsecured overdrafts
Role of central bank
-Banker to government
-banker to banks
-regulatory function
Role of corporate banks
Take deposits and lend to businesses
Role of investment banks
-Trade for own gain
-Advise and support companies:
-Flotations
-Bond issues
-Mergers and acquisitions
What does a retail bank specialise in?
Banks that specialise in taking deposits and providing loans to individuals
What do corporate banks specialise in?
Banks that specialise in taking deposits and providing loans to businesses. Often referred to as commercial banks.
Key features of a bank loan
-A form of debt where a borrower receives a certain amount from a lender (the bank). The borrower agrees to pay a contracted rate of interest to the lender and also frees on a repayment date.
-Loan is normally for a set period
-At a set rate of interest
-With a defined repayment schedule.
What is an unsecured loan
A loan provided to a borrower where the lender takes no security.
What is a mortgage?
A mortgage loan is a long-term loan used to finance the purchase of real estate.
-The money lent by the bank is secured against the value of the property.
Key features of overdrafts
-A form of borrowing from a bank where the lending bank can demand repayment at any time.
-Bank overdrafts are generally:
-Flexible
-At a variable rate of interest
-An arrangement fee may also be repayable
-unsecured and repayable on demand.
What is a payday loan?
A short-term cash loan that is usually paid back when you receive your next paycheck.
