Financial Markets Flashcards
What are the 4 functions of money
Medium of exchange
Standard of deferred payment
Store of value
Unit of account (Compare value)
What is liquidity
How quickly and certainly money can become cash
From highest to lowest, place assets in order of liquidity
Cash
Sight Deposit (withdrawal limit at bank)
Treasury bill
Gold bar
2yr Corporate Bond
Gilt (10 year gov, bond)
Advances (loans)
Why do commercial banks need to keep a certain reserve ratio
To ensure they are liquid enough to meet customers cash needs
Who is the central bank in America
Federal reserve
Who is the main regulator of financial institutions
The FCA
Give 3 ways in which financial institutions facilitate economic growth and development
Providing liquidity for investors (loans)
Allowing businesses to function (payment systems)
Allowing smooth consumption for households (credit cards)
Facilitating mergers and aquisitions
Give 4 macro impacts of financial institutions
Positive contribution to GDP
Employment (following trumps DEI department redundancies Goldman Sachs have removed their inclusive hiring policy)
Government revenue
Support supply side developments through loans
What are bonds
A security sold by the government to borrow and finance debt
Describe the relationship between the price of bonds and interest rates
The price of bonds is inversely related to interest rates
Why does increased demand for bonds mean a lower bond yield
As they trust trust they will get paid
Why does the UK have relatively low bond yields
We are secure
Poor returns in the private sector
State 5 reasons why long term bond yields in the UK are rising
Inflation concerns
Monetary policy expectations
Government borrowing
Global market trends
Weaker economic growth outlook
How do Inflation concerns mean long term bond yields in the UK are rising
Reduces the purchasing power of fixed income bonds, prompting investors to demand higher yields to compensate
How do Monetary policy expectations mean long term bond yields in the UK are rising
Speculation around persistence of high interest rates raises the cost of borrowing and causes bond yields to rise
How does government borrowing mean long term bond yields in the UK are rising
Larger debt issuance increasing supply in the bond market, pushing prices down and yields up
How do global market trends mean long term bond yields in the UK are rising
As major central banks maintain high interest rates, UK yields rise in tandem due too interconnected financial markets
How does a Weaker economic growth outlook mean long term bond yields in the UK are rising
Investors require higher yields as compensation for perceived economic risks
What are 7 key functions of commercial banks
Accepting deposits
Providing loans
Credit creation
Facilitating payments
Investment services
Foreign exchange services
Safekeeping of valuables (safety deposit boxes)
What are the two ways in which commercial banks accept deposit
Creation of
Current accounts
Savings accounts
What do banks use their primary source of funds (deposits) for
To offer loans
State 3 types of advances
Personal loans
Business loans
Mortgages
How do commercial banks create credit
Through lending activities
State 4 ways in which commercial banks facilitate payments
Cheques
International transfers
Debit-Credit cards
Online banking
State 2 investment services of commercial banks
Wealth management
Financial advisory
State 3 foreign exchange services offered by commercial banks
Currency exchange
Letters of credit
Trade finance
What do the foreign exchange services which commercial banks offer do
Facilitate international trade
What are the 7 functions of the bank of England
Monetary policy
Financial stability
Issuing currency
Managing government debt
Regulating Banks
Maintaining payment systems
Supporting Governments economic policies
What is the primary role of the bank of England
Controlling inflation
Why does the bank of England change interest rates
In order to stimulate economic activity or control inflation
Which sector of the bank of England controls monetary policy
The Monetary Policy Committee (MPC)
What are the two ways in which the bank of England ensures financial stability
Preventing financial crises
Acting as a lender of last resort
How does the bank of England prevent financial crises
Works with other regulatory bodies such as the PRA to ensure financial institutions are operating safely
How is the bank of England a lender of last resort
They provide emergency liquidity to financial institutions to prevent systemic failures
How does the bank of England manage government debt
Involves overseeing the issuance of government bonds and managing the governments cash balances
How does the bank of England supervise banks
Through the PRA, ensuring financial institutions adhere to regulatory requirements
How does the bank of England maintain payment systems
Regulates key infrastructure like the RTGS system, which processes large value transactions
How does the bank of England support the governments economic policies
In previous years, the only objective of the bank of England was to control inflation. Now it is allowed to factor in other factors such as growth and employment (Now since the government said their main target it growth they would be reluctant to raise interest rates)
What is the equation for calculating bond yield
Rate of interest/price of bond x 100 = Yield
What are the roles of the bank of england
