Financial Markets Flashcards
Money Supply
The total supply of money in the economy
Divided into two :
- Narrow Money
- Broad Money
Narrow Money
Money that is ready to spend immediately .
e.g cash, money in debit/credit cards
Broad Money
Money that is harder to access and can’t be spent immediately.
INCLUDES ALL NARROW MONEY AS WELL
e.g money tied up in saving accounts, cheques, government bonds
Types of Financial Markets
1- Money Market
2- Capital Market
3- Foreign Exchange Market
Money Market
Where you can buy and sell short-term financial assets.
e.g short term loans and overdrafts
IOUS < 1 year
Capital Market
Where you can buy and sell long-term financial assets.
e.g large business loans ( Apple looking to expand - £3mil loan )
IOUs > 1 year
Foreign Exchange Market
Where you can buy and sell foreign currencies.
e.g US dollars
Two ways to raise money for business to get big
- Debt
- Equity
Debt
Borrowing money from a bank or issuing corporate bonds.
When a company takes on debt it MUST pay it back.
Equity
By selling a percentage of the company to investors using shares.
Investors gets a percentage of companies future profits.
Maturity
When the final interest on a bond must be paid
e.g maturity of 5 years - gov must pay bond holder final interest payment on the bond in 5 years
Coupon Rate
Annual interest rate received on a bond.
e.g. yearly interest 1% —> coupon rate 1%
biannual interest 4% —> coupon rate 2%
Yield
Interest received on a bond
e.g. interest rate 5% —> yield 5%
Commercial Bank
Facilitate everyday transactions such as putting money in savings accounts, taking out mortgages and taking out cash
E.g Natwest , Barclays , Halifax
Investment Bank
Make investments to make money
E.g Goldman Sachs
Liquidity
How much cash a commercial bank has
How easy it is to turn assets into cash
Liquidity Ratio
Liquid Assets ( cash) /Deposits
Higher ratio = More liquid and more cash available to repay customers who have deposited money at the bank
Profit-Liquidity Tradeoff
By trying to increase profitability and giving out more loans , commercial banks therefore decrease their liquidity and ability to give back money to consumers which can have negative consequences
Capital Ratio
Measures how much capital a bank has compared to it’s loans it’s lent out
Capital ( IN BANKING )
Money in the bank from the owners of the bank
Conventional Monetary Policy
Manipulating interest rates
Unconventional Monetary Policy
Quantitative Easing
Forward Guidance
Funding for Lending
Quantitative Easing
Forward Guidance
To prevent confidence draining out of the market
Limited by lack of credibility e.g BoE didn’t increase IR when unemployment rates hit 7%
Funding for Lending
Pot of £70 billion
Aim to increase lending, investment and consumption by allowing commercial banks to borrow money at 0.25% ( lower than base rate of 0.5% ) lending it directly to businesses
BUT small compared to £4.1 trillion that was lost in financial crisis
Types of Financial Market Failure
1) Asymmetric information
2) Speculation and Market bubbles
