Financial markets

Question 1

Money Supply

Answer 1

the value of the stock of money that exists within an economy at a point in time

Question 2

The role of financial markets?

Answer 2

enable transfers between those who wish to deposit funds and those looking to borrow funds

Question 3

The money market?

Answer 3

deals in short term finance between firms, individuals and gov
- focusing on debts to be repaid in the near future

Question 4

The capital market?

Answer 4

• deals with medium to long term finances
• deals with raising finance through shares and bonds
• debts due for repayment more than a few months ahead

Question 5

The foreign exchange market?

Answer 5

deals with transactions requiring conversion from one currency to another

Question 6

Spot market?

Answer 6

conversion of currencies at the current market rate

Question 7

Forward market?

Answer 7

agreement to buy currency at some future date at an agreed exchange rate

Question 8

Bond?

Answer 8

A form of borrowing giving the holder a fixed rate of interest and the money is repaid within a set period of time

Question 9

Equity?

Answer 9

the value of share capital issued by firms as part of their financial capital

Question 10

coupon?

Answer 10

the fixed interest on a bond

Question 11

maturity date?

Answer 11

the date of repayment for a bond

Question 12

Relationship between interest rates and bond prices?

Answer 12

inverse

- if interest rates rise, bond prices fall

Question 13

Bond yield equation?

Answer 13

coupon on bond / market price of bond x 100

Question 14

Commercial bank?

Answer 14

accepts deposits from and lends money to the general public, usually for personal and business loans

Question 15

Investment bank?

Answer 15

provides financial services to other businesses, such as arranging share or bond issues

Question 16

Objectives of commercial banks?

Answer 16

• Liquidity
• Profitability
• Security

Question 17

Liquidity

Answer 17

Banks have to manage assets- ensure they have sufficient notes and coins to meet the needs of customers withdrawing cash

Question 18

What happens if banks isnt liquid

Answer 18

has to borrow money and pay interest from the financial markets

Question 19

Profitability

Answer 19

holding notes and coins doesn’t generate return

make profit by lending out money to borrowers and charging interest

Question 20

PRA

Answer 20

• micro-prudential regulation
• aims to improve financial stability by ensuring financial institutions are managed properly and maintain certain capital and liquidity ratios

Question 21

FPC

Answer 21

• macroprudential
• identify, monitor and take action to remove systematic risks.
• stress tests

Question 22

Systematic risk?

Answer 22

risks that could lead to a collapse in the whole or a significant part of the financial system

Question 23

Stress Tests?

Answer 23

hypothetical exercises that see how banks would be affected by various economic shocks

Question 24

FCA

Answer 24

• micro prudential

- aims to protect consumers and ensure healthy competition between financial institutions

Question 25

moral hazard

Answer 25

occurs when one institutions takes on too much risk, knowing that if the risk fails, someone else will cover the costs of that risk

Question 26

Capital liquidiity ratio

Answer 26

where banks hold set amounts of liquid assets as a proportion of their overall lending or capital

Question 27

Systemic risk?

Answer 27

risk that applies to the whole sector

Question 28

Issues with regulation

Answer 28

• restricts economic activity - if lending is too difficult to obtain
• may divert financial service industry output to other countries = jobs lost
• requires time and money
• unintended consequences = development of a shadow banking sector