Definitions

Question 1

Market

Answer 1

Place where buyers and sellers come together in order to trade and exchange

Question 2

Bills

Answer 2

Short dated loans and no Intrest

Question 3

Bonds

Answer 3

Long term borrowing come with annul Intrest (coupons)

Fixed rate of return

Question 4

Where can a bond also be re sold in ?

Answer 4

Secondary capital markets as it can have several owners over its life times

Investors only care about Intrest relative to what bond would sell for now

Question 5

Liquidity

Answer 5

how easily an asset can be turned into cash

Question 6

Financial markets

Answer 6

Market for financial assets

Question 7

Money markets

Answer 7

Provide short term lending/ borrowing

Assets mature in less than 1 year or 1 day

Treasury bills and ceommercial bills

Promote liquidity

Question 8

Capital markets

Answer 8

Trading shares and bonds

Financial market which provides long term lending Long term

Fund long term growth

Made up of primary and secondary markets

Question 9

Foreign exchange markets

Answer 9

Also called FX

Trade in currencies

Biggest financial markets, trades regularly

Question 10

Primary markets

Answer 10

For new issues (ipo initial public offering)

Or bonds newly issued by the government

Question 11

Secondary markets

Answer 11

Securities sold second hand e.g London stock exchange

Question 12

Spot market

Answer 12

Exchange takes place immediately

Question 13

Foward markets

Answer 13

At some specified time in the future

Question 14

Fractional reserve banking

Answer 14

System in which only a fraction of deposits are held in cash

Rest is advanced to borrowers

Question 15

Reserve banking

Answer 15

Proportion of deposits that a commercial bank is required to retain in a system of fractional reserve banking

Question 16

Yield

Answer 16

Return on an asset

Question 17

Central banks

Answer 17

Bank such as the Bank of England that acts as a national bank

and provides services to government and banking systems

and controls monetary policy committee

Question 18

Government bonds / guilts

Answer 18

A long term source of finance for government , used to finance budget deficit

Investors buy a sum of money and is returned to them when bond matures

Question 19

Quantative easing

Answer 19

Large scale purchase’s of securities (assets)

Question 20

Time lags

Answer 20

Bank of England estimates a change in the bank rate will effect output within a year

But full impact on inflation takes 2 years

Question 21

Size of the effect of Time lags

Answer 21

1 % point change in Intrest rates affects output by 0.21% - 0.35% of a year and inflation by 0.2- 0.4 pp after 2 years

Question 22

Helicopter money

Answer 22

Giving money directly to citizens

Question 23

Forward guidance

Answer 23

Whereby central bank gives signals to financial markets over future directions of monetary policy committee

Question 24

Funding for lending scheme

Answer 24

Launched by the B.O.E

Encourages bank and building societies to expand lending to households by offering cheap credit

Question 25

Money supply

Answer 25

Total quantity of money in an economy

Question 26

Why do falling bond yield bring down Intrest rates ?

Answer 26

Makes other investments more rewarding

If investors move to other financial assets e.g shares process repeats demand increases price increases and return falls

If saving is more attractive as bonds etc become less rewarding increases bank deposits shifting supply curve for lonable funds to right from s1 to s2 excess supply market Intrest rate falls