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

Currency spot market

Answer 5

Market where you can buy currency at the current exchange rate and get the money NOW
(Tourists will use this)

Question 6

Currency futures market

Answer 6

Market where you can buy currency at the current exchange rate and get the money in the FUTURE
(firms who import and predict a depreciation in value of the pound will use this)

Question 7

How to calculate the yield on bonds

Answer 7

(Coupon/market price)

Question 8

how to calculate money multiplier

Answer 8

1/ reserve assest ratio (in decimal form)

Question 9

What is the reserve asset ratio

Answer 9

the percentage of money that is kept on the bank

Question 10

Quantitate easing definition

Answer 10

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

Question 11

How does QE work (analysis)

Answer 11

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 12

How does QE benefit consumers

Answer 12

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 13

2 problems with QE

Answer 13

1. a devalued domestic currency

2. risk of inflation

Question 14

What 3 things are on a bonds

Answer 14

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

Question 15

Principal agent problem

Answer 15

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

Question 16

What happens if banks are over regulated

Answer 16

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

Question 17

what does the financial policy committee do

the macro prudential regulation

Answer 17

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.