Financial Markets

Question 1

What are the 2 types of finance?

Answer 1

1) Short term finance.
2) Long term finance.

Question 2

What is a financial market?

Answer 2

A market where buyers and sellers exchange securities (financial assets), such as equities (shares), currencies, and bonds.

Question 3

What is short term finance (give example)?

Answer 3

The use of credit that is repaid in/provided for one year or less. E.g. treasury bills, commercial bank loans, etc.

Question 4

What is long term finance (give example)?

Answer 4

The use of credit that is repaid in/provided for more than one year. E.g. bonds, long-term government loans, mortgages, etc.

Question 5

What are the 3 types of financial markets?

Answer 5

1) Money markets.
2) Capital markets.
3) Foreign exchange markets.

Question 6

What are money markets?

Answer 6

A component of the economy that provides short-term finance, such as borrowing or lending.

Question 7

What are capital markets?

Answer 7

A component of the economy that provides long-term finance, mainly by the trading of bonds and shares.

Question 8

What are foreign exchange markets?

Answer 8

A component of the economy where different currencies are traded.

Question 9

What are the 5 roles/purposes of financial markets?

Answer 9

1) Facilitate saving.
2) To lend to businesses and individuals.
3) Facilitate the exchange of goods and services.
4) To provide forward markets in currencies and commodities.
5) To provide a market for equities.

Question 10

How do financial markets facilitate saving?

Answer 10

Financial assets (e.g. money, shares, bonds, bank deposits, etc.) can be used to save money. Financial institutions provide firms and households the opportunity to use these assets.

Question 11

Why do businesses and individuals borrow from financial institutions?

Answer 11

Households may borrow money in order to pay for goods and services, such as a mortgage or a car. Firms may borrow in order to invest in new facilities and equipment. This can boost the economy.

Question 12

How do financial markets facilitate the exchange of goods and services?

Answer 12

Financial institutions create payment systems to ensure goods and services can be traded. E.g. the central bank prints notes/mints coins, whilst banks process cheques and debit/credit card transactions.

Question 13

How do financial markets provide forward markets in currencies and commodities?

Answer 13

Financial institutions make forward markets possible, as firms like to have certainty when making decisions, and will often sell/buy forward.

Question 14

What is equity?

Answer 14

The shares/stocks of a company.

Question 15

How do financial markets provide a market for equities?

Answer 15

Financial institutions allow for the issuing of shares, which is important for firms, as it raises finance for investment. Stock markets trade shares.

Question 16

What are forward markets?

Answer 16

A marketplace for transactions that will occur at an agreed time in the future. Futures (contracts) are made at a price agreed today, but supplied later. Forward markets are used by firms that import and export, and by those who deal in commodities, due to their volatile prices.

Question 17

What are some possible examples of a household using financial institutions/markets (4 possible)?

Answer 17

1) Savings account to pay for a new car.
2) A mortgage to pay for a house.
3) Paying for goods/services with a credit card.
4) Visiting a travel agent to buy foreign currency for a holiday abroad.

Question 18

What are commercial banks?

Answer 18

High street/retail banks that primarily serve the general public.

Question 19

What are the 3 core functions of commercial banks?

Answer 19

1) Accepting deposits to facilitate saving and provide security.
2) Lending money to economic agents who wish to borrow.
3) Providing an efficient means of payment/transfer of funds between economic agents.

Question 20

What are the core functions (3) of investment banks?

Answer 20

1) To help financial institutions (including the government, firms, pension funds, insurance companies, etc.) raise finance by giving advice, arranging the new issue of shares or corporate bonds, and helping them to manage the risk in doing so.
2) They can also provide advice to firms in regards to financial takeovers (mergers and acquisitions), and to governments in regards to privatisation.
3) They can buy and sell corporate and government bonds on behalf of their clients, and for themselves.

Question 21

What are some examples of commercial banks (3)?

Answer 21

HSBC (both), Santander, NatWest, Lloyds (both), Barclays (both), etc.

Question 22

What are some examples of investment banks (3)?

Answer 22

J.P. Morgan Chase, Morgan Stanley, Goldman Sachs, Citigroup, Deutsche Bank, Credit Suisse, etc.

Question 23

What are the 2 primary sources of lending?

Answer 23

1) Issuing corporate bonds.
2) Bank borrowing.

Question 24

What are corporate bonds?

Answer 24

A loan made to a company for a fixed period of time by an investor, for which they receive a defined return. Once issued, corporate bonds can be traded on secondary markets, with investors receiving annual payments and a principle sum for their money.

Question 25

What is bank borrowing?

Answer 25

A loan taken from a commercial bank and repaid with interest over a pre-determined period of time.

Question 26

What are hedge funds?

Answer 26

Actively managed investment pools, whose managers use a wide range of strategies, including leverage (borrowed money) and the trading of non-traditional assets, to earn above-average investment returns for clients.

Question 27

What is crowdfunding?

Answer 27

Raising money/funding a business by getting small amounts of capital from a large number of people.