Financial markets

Question 1

what financial assets is sold in a money market

Answer 1

a financial asset with a maturity date of less than a year

Question 2

what financial assets is sold in a capital

Answer 2

a financial asset with a maturity date of greater than a year
Eg Bonds and capital

Question 3

Debt capital

Answer 3

Financial asset paid back with interest

Bonds

Question 4

Equity capital

Answer 4

Financial asset given to business in exchange for a share in business and dividends (share of profit)

Question 5

How to calculate the yield on bonds

Answer 5

(Coupon/market price)X100

Question 6

how to calculate money multiplier

Answer 6

1/ reserve assest ratio (in decimal form)

Question 7

What is the reserve asset ratio

Answer 7

the percentage of money that is kept on the bank

Question 8

Quantitate easing definition

Answer 8

government re-buys their own bonds to make debt cheap.

Question 9

How does QE work (analysis)

Answer 9

As the government buys back bonds the demand for them increases.
This raises the price of the bonds.
Causing the yield to decrease.
Governments can release new bonds with a coupon at to match the yield and can borrow more money with a cheap interest.

Question 10

How does QE benefit consumers

Answer 10

when the government buys bonds off banks it increases the banks supply of money to increase lending which may result in an outward shift in AD

Question 11

2 problems with QE

Answer 11

1. a devalued domestic currency

2. risk of inflation

Question 12

What 3 things are on a bonds

Answer 12

1. Coupon (interest)
2. maturity date (date at which the bond is repaid)
3. face value price

Question 13

Principal agent problem

Answer 13

when one person takes more risk for personal gain because someone else has the bear the cost of those risks

Question 14

What happens if banks are over regulated

Answer 14

1. it may restrict spending and investment as banks limited their credit
2. banks may relocate to countries where there is less regulation

Question 15

what does the financial policy committee do

the macro prudential regulation

Answer 15

Its role is to identify, monitor and take action to remove or reduce ‘systemic risk’. The FPC can make recommendations and also give directions to the PRA and the FCA on actions that should be taken to remove or reduce risk. However, the FCA has no direct powers over the individual financial institutions.

Question 16

what is moral hazard

Answer 16

Moral Hazard is the concept that individuals have incentives to alter their behaviour when their risk or bad-decision making is borne by others.

Banks might take more risks if they know the Bank of England or the government can help them if things go wrong.

Question 17

what does market rigging mean

Answer 17

when interest rates are fixed due to collusive activity.

This should be banned to maintain consumer welfare

Question 18

maximum interest rates

how do they reduce systemic risk

Answer 18

when the price of borrowing must be legally charged below a set price

as banks seek to maximise profit they may be less willing to lend out risky loans as there is a lower change of getting their money back. by being able to charge higher interest rates they may be more likely to give out these loans

Question 19

how does deregulation solve market failure in financial markets

Answer 19

currently financial markets set the price too high at P1 and as a result those on variable mortgages may have lower standard of living as a result

by increasing competition banks may be more willing to differentiate themselves by offering low interest

Question 20

setting capital and liquidity ratios

Answer 20

forces banks to keep more liquidity to improve ability to overcome short term liabilities

Question 21

what is the problem with forcing banks to increase liquidity measures

Answer 21

1. banks may make less profit and be incentivised to set up in the UK.
   with less competition banks such as Barclays may be more able to charge higher interest rates and get a higher return on savings

Question 22

how to calculate capital ratio

Answer 22

loans

Question 23

problems with regulation of financial markets

Answer 23

1. moral hazard
2. regulatory capture
3. asymmetric information

Question 24

why is regulatory capture likely in the banking industry

Answer 24

1. many regulators are previous bank managers so may already have existing relationships within the industry.

Question 25

why is asymmetric information damaging in the banking industry

Answer 25

when banks hide information about liquidity or risky investments it may force the government to set liquidity ratios at a level too high or too low