Definitions Flashcards
Market
Place where buyers and sellers come together in order to trade and exchange
Bills
Short dated loans and no Intrest
Bonds
Long term borrowing for governments come with annul Intrest (coupons)
Fixed rate of return
Where can a bond also be re sold in ?
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
Liquidity
how easily an asset can be turned into cash
Financial markets
Market for financial assets
Money markets
Provide short term lending/ borrowing
Assets mature in less than 1 year or 1 day
Treasury bills and ceommercial bills
Promote liquidity
Capital markets
Trading shares and bonds
Financial market which provides long term lending Long term
Fund long term growth
Made up of primary and secondary markets
Foreign exchange markets
Also called FX
Trade in currencies
Biggest financial markets, trades regularly
Primary markets
For new issues (ipo initial public offering)
Or bonds newly issued by the government
Secondary markets
Securities sold second hand e.g London stock exchange
Spot market
Exchange takes place immediately
Foward markets
At some specified time in the future
Fractional reserve banking
System in which only a fraction of deposits are held in cash
Rest is advanced to borrowers
Reserve banking
Proportion of deposits that a commercial bank is required to retain in a system of fractional reserve banking
Yield
Return on an asset
Central banks
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
Government bonds / guilts
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
Quantative easing
Large scale purchase’s of securities (assets)
Time lags
Bank of England estimates a change in the bank rate will effect output within a year
But full impact on inflation takes 2 years
Size of the effect of Time lags
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
Helicopter money
Giving money directly to citizens
Forward guidance
Whereby central bank gives signals to financial markets over future directions of monetary policy committee
Funding for lending scheme
Launched by the B.O.E
Encourages bank and building societies to expand lending to households by offering cheap credit
Money supply
Total quantity of money in an economy
Why do falling bond yield bring down Intrest rates ?
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
Macroprudential
Overall stability of the finanacial system
Microprudential
Risks to induvidual banks and financial institutions
Fianacial conduct authority
Microprudential regulator that focuses on promoting competion and protecting consumers
Financial policy committee
Macroprudential regulator
Primary function is to maintain stability of the fianacial system
Secondary objective is supporting the governments economic policy
Prudential regulation authority
Microprudential regulator , regulates and supervises induvidual banks , building societies , credit unions , insureres and major investment funds
Stress test
Assesses resilience of a finanacial institution such as a bank to an adverse scenario e.g recession and rising unemplyment
Moral hazard
Scenario where firm takes excessive risk in the pursuit of profit knowing someone else will bear significant proportion of the cost
Systematic risk
Risk to whole financial system because of connections between institutions
Capital ratio
Proportion of banks funding that has come in the form of equity (retained profit)
Banks with higher capital ratios are safe
Liquidity ratio
Ratio between banks liquid assets and expected outflows
More cash business holds relative to withdrawals higher liquidity ratio and safer it will be
