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Macroeconomics > Financial Markets > Flashcards

Financial Markets Flashcards

1
Q

6 Characteristics of Money

A

Acceptable
Portable
Durable
Divisible
Limited
Difficult to forge

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2
Q

4 Functions of money

A

1) Medium of Exchange
2) Store of Value
3) Unit of Account
4) Standard of deferred payment

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3
Q

Narrow Money

A

A measure of the value of coins in circulation and other money equivalents that are easily convertible into cash in hand.

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4
Q

Broad Money

A

A measure of the total amount of money held by households and companies in an economy, eg. including assets with low liquidity.

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5
Q

Liquidity

A

The ease at which an asset can be converted into cash in hand.

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6
Q

Balance Sheets

A

A balance sheet refers to a statement of assets, liabilities and equity of a business or bank.

Assets - Liabilities = Equity

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7
Q

Definition / Function of Financial Markets

A

To channel funds from those who have surplus funds to those with a shortage of funds.

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8
Q

Money Market + Examples

A

Provides short-term finance to individuals, firms and govts. Transaction examples include - purchasing treasury bonds, interbank lending and short-term debts.

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9
Q

Capital Account

A

Provides medium and long-term finance to individuals, firms and governments. Companies can raise long-term finance by issuing shares or corporate bonds but they can also borrow from banks. Divided into two further accounts

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10
Q

Primary Market (Capital Account)

A

The primary market gives access to newly issued securities sold by companies and governments.

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11
Q

Secondary Account (Capital Account)

A

Trade previously issued (second hand) securities.

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12
Q

FOREX

A

Deals with the purchasing and selling of different currencies. Split into two further markets:

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13
Q

Spot Market (FOREX)

A

The immediate purchase of a currency

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14
Q

Forward Market (FOREX)

A

The exchanges of foreign currencies at a specified time in the future.

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15
Q

Debt Capital

A

Capital that has been raised by taking out a loan from a bank.

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16
Q

Share Capital

A

Capital that has been raised by issuing shares.

17
Q

Debt

A

Refers to an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. This can be otherwise known as deferred payment.

18
Q

Equity

A

Measured by subtracting liabilities from the value of the assets. Therefore, this can be used to determine the actual value of a person’s assets.

19
Q

Key features of Commercial Banks

A

Provide loans + overdrafts to individuals
Profit Max // Share-holder satisfaction
Accepting cash deposits
Effective means of payment
Mortages
Financial Advice

20
Q

Key Features of Investment Banks

A

Trade securities on behalf of their clients.
Advising on new share issues,
Help with mergers,
underwriting new share issues,
finance larger infrastructure projects,
managing investment portfolios.

21
Q

G-SIB

A

Global systemically important bank

22
Q

Functions of Central Banks

A
  1. Monetary Policy
  2. Financial Stability / Regulation
  3. Govt. Policy / Lender of last resort
23
Q

Credit Creation

A

Providing a loan (asset) creates a corresponding liability for the bank in the form of a deposit in the customer’s bank account.

Banks make profit from credit creation by ensuring that the cost of borrowing exceeds the reward for saving.

24
Q

Money Multiplier

A

Where an initial deposit into a bank leads to a proportionally greater increase in the money supply. It is calculated as 1/ reserve ratio.

25
Q

Bond Yield Calculation

A

Yield = Coupon x100
Market Price

26
Q

Relationship between Bonds + Interest Rates

A

An inverse relationship between bond prices and interest rates.

Most bonds pay a fixed interest rate which becomes more attractive (greater yields) as interest rates fall.

As demand for bonds increases, demand-pull inflation drives up the price of bonds.

27
Q

Prudential Regulation Authority (PRA)

A

Operate under the Bank of England

Regulate, supervise and promote effective competition

1,700 commercial banks and other financial institutions

a microprudential regulator.

They supervise financial institutions to ensure that they are effectively managing risk.

They can also set capital and liquidity ratios.

28
Q

Financial Policy Committee (FPC)

A

Operating under the Bank of England,
Identify, monitor and protect banks from systemic risk Macroprudential regulator.
Advise the Government on managing financial markets.

29
Q

Financial Conduct Authority (FCA)

A

Funded by the firms it regulates
Protection for customers
Protect the integrity of the UK financial system
Promote competition.
Eg. Banned PPI

30
Q

Tools of Financial Regulation

A

Capital Ratios
Liquidity Ratio
Basel III agreement
Stress Tests

31
Q

Capital Ratios

A

The amount of capital (assets - liabilities = capital) expressed as a % of total assets. This is calculated as (capital / assets) X 100. The objective of capital ratios is to prevent insolvency.

32
Q

Liquidity Ratio

A

A set amount of liquidity that a bank must possess
It is calculated as current assets (short-term) / current liabilities (short-term).

33
Q

Basel III Agreement

A

Establish international standards for banking regulation In wake of the 2007-8 financial crisis.

Liquidity Coverage Ratios (LCR) which suggested that all banks should possess 100% liquidity for all liabilities < 30 days.

Another key feature is that banks are suggested to keep an 8% minimum capital to loans ratio.

34
Q

Stress Tests

A

Used to measure the extent to which financial institutions are vulnerable to the effects of extreme economic events.

35
Q

Consequences of Bank Failure

A

Systemic Risk
Recession
Bank Bailouts

36
Q

Evaluation of Banking Regulation

A

Moral Hazard
Regulatory Capture
Asymetric Info
Enforcement Costs
Shadow Banking

37
Q

Bank Run

A

When banks do not have sufficient liquid assets to meet short-term liabilities

38
Q

Insolvency

A

When banks do not have sufficient assets to meet their liabilities

Assets < Liabilities

Macroeconomics (16 decks)

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