Financial markets Flashcards

1
Q

What is the role of financial markets?

A

Saving
Help businesses with investments
Help the exchange of goods and services

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2
Q

What is a money market?

A

Liquid markets
Trading assets that only last a year

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3
Q

What is a financial market?

A

Where buyers and sellers meet to trade assets

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4
Q

What is a currency market?

A

Buying and selling currency

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5
Q

What is debt capital?

A

Assets in which interest is made
Borrowing for the issuer

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6
Q

What is equity capital?

A

Paying back profits (shares)

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7
Q

Why do we need forward markets?

A

Buy currency while it is weak
Speculate it will increase in the future
Sell it and make money

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8
Q

Why is the demand curve for currency downwards sloping?

A

At lower interest rates consumers hold more money
At higher interest rates consumers save more money as the rate of return on savings is higher

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9
Q

How can central banks lower interest rates?

A

Lower reserve requirement
Increase the money supply
Lower interest rates

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10
Q

How can the central bank help businesses?

A

They can borrow money
Increase their liquidity

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11
Q

What is a bond?

A

A piece of paper
You pay for it
You are guaranteed the face value of the bond back
It is used to generate revenue for firms

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12
Q

What does it mean if a bond matures?

A

The time when the government have to pay the money back at nominal value

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13
Q

What is fractional reserve banking?

A

Saver saves £100 in the bank
They need to keep some of it still in the bank as a reserve £10
Borrower borrows £90
They are charged interest on this
Money that is extra is the profit that banks make

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14
Q

What is a bank run?

A

Liquidity crisis
They do not have enough money liquid assets in the short run to meet short term liabilities

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15
Q

What is insolvency?

A

Not enough capital to offset a fall in asset values
For example if loans get written off
They need to cover the losses with assets
If they cant cover this the bank will be in debt

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16
Q

What is the role of the central bank?

A

Monetary policy
Bankers to governments
Bankers to other banks
Regulate financial stability

17
Q

When will central banks not intervene?

A

If a bank goes insolvent
They make bad decisions on loans

18
Q

What is moral hazard?

A

When a risk is taken by a commercial bank
The costs are bared by the central bank
They may be more inclined to take risks in terms of loans

19
Q

What is regulatory capture in financial markets?

A

Regulators that used to work for the central bank
They may lower interest rates if they are friends with insiders

20
Q

What is the definition of financial market failure?

A

When free financial markets fail to allocate resources at the socially optimum level of output

21
Q

What is speculation ?

A

Buying assets with the idea that they will increase in value so you can sell them

22
Q

What is a leveraged deal?

A

Borrowing money
Buying an asset
Holding the asset
Selling it at a higher price
Paying off the debt
Keeping the profit

23
Q

What is an example of a bubble?

A

Tanzanian cherries
People buy them hoping their price will rise
People start to sell them
Price falls
Demand falls
They are not worth anything

24
Q

What is assymetric information in financial markets?

A

Consumers know they are unable to pay back loans but the bank do not know that

25
Q

What are externalities?

A

Costs of bailouts
Loss of jobs
Loss of stability in the economy

26
Q

What is market rigging?

A

Collusion to fix prices to make more money
LIBOR and FOREX

27
Q

What are macroprudential regulators? (FPC)

A

They monitor the entire financial sector
Prevent and identify systemic risk

28
Q

What is systemic risk?

A

Complete financial meltdown

29
Q

What is micro prudential regulators? (PRA)

A

Maintain stability of commercial banks
Supervise risk

30
Q

What is the role of the financial conduct authority?

A

Protect individual consumers and business confidence

31
Q

What is the difference between the FCA and the FPC/PRA?

A

They report to the treasury