Financial Markets

Question 1

What are the 4 functions of money

Answer 1

Medium of exchange
Standard of deferred payment
Store of value
Unit of account

Question 2

What is liquidity

Answer 2

How quickly and certainly money can become cash

Question 3

From highest to lowest, place assets in order of liquidity

Answer 3

Cash
Sight Deposit
Treasury bill
Gold bar
2yr Corporate Bond
Gilt (10 year gov, bond)
Advances (loans)

Question 4

Why do commercial banks need to keep a certain reserve ratio

Answer 4

To ensure they are liquid enough to meet customers cash needs

Question 5

Who is the central bank in America

Answer 5

Federal reserve

Question 6

Who is the main regulator of financial institutions

Answer 6

The FCA

Question 7

Give 3 ways in which financial institutions facilitate economic growth and development

Answer 7

Providing liquidity for investors
Allowing businesses to function
Allowing households to smooth consumption

Question 8

Give 4 macro impacts of financial institutions

Answer 8

Positive contribution to GDP
Employment
Government revenue
Support supply side developments through loans

Question 9

What are bonds

Answer 9

A security sold by the government to borrow and finance debt

Question 10

Describe the relationship between the price of bonds and interest rates

Answer 10

The price of bonds is inversely related to interest rates

Question 11

Why does increased demand for bonds mean a lower bond yield

Answer 11

As they trust trust they will get paid

Question 12

Why does the UK have relatively low bond yields

Answer 12

We are secure
Poor returns in the private sector

Question 13

State 5 reasons why long term bond yields in the UK are rising

Answer 13

Inflation concerns
Monetary policy expectations
Government borrowing
Global market trends
Weaker economic growth outlook

Question 14

How do Inflation concerns mean long term bond yields in the UK are rising

Answer 14

Reduces the purchasing power of fixed income bonds, prompting investors to demand higher yields to compensate

Question 15

How do Monetary policy expectations mean long term bond yields in the UK are rising

Answer 15

Speculation around persistence of high interest rates raises the cost of borrowing and causes bond yields to rise

Question 16

How does government borrowing mean long term bond yields in the UK are rising

Answer 16

Larger debt issuance increasing supply in the bond market, pushing prices down and yields up

Question 17

How do global market trends mean long term bond yields in the UK are rising

Answer 17

As major central banks maintain high interest rates, UK yields rise in tandem due too interconnected financial markets

Question 18

How does a Weaker economic growth outlook mean long term bond yields in the UK are rising

Answer 18

Investors require higher yields as compensation for perceived economic risks

Question 19

What are 7 key functions of commercial banks

Answer 19

Accepting deposits
Providing loans
Credit creation
Facilitating payments
Investment services
Foreign exchange services
Safekeeping of valuables (safety deposit boxes)

Question 20

What are the two ways in which commercial banks accept deposit

Answer 20

Creation of
Current accounts
Savings accounts

Question 21

What do banks use their primary source of funds (deposits) for

Answer 21

To offer loans

Question 22

State 3 types of advances

Answer 22

Personal loans
Business loans
Mortgages

Question 23

How do commercial banks create credit

Answer 23

Through lending activities

Question 24

State 4 ways in which commercial banks facilitate payments

Answer 24

Cheques
International transfers
Debit-Credit cards
Online banking

Question 25

State 2 investment services of commercial banks

Answer 25

Wealth management
Financial advisory

Question 26

State 3 foreign exchange services offered by commercial banks

Answer 26

Currency exchange
Letters of credit
Trade finance

Question 27

What do the foreign exchange services which commercial banks offer do

Answer 27

Facilitate international trade

Question 28

What are the 7 functions of the bank of England

Answer 28

Monetary policy
Financial stability
Issuing currency
Managing government debt
Regulating Banks
Maintaining payment systems
Supporting Governments economic policies

Question 29

What is the primary role of the bank of England

Answer 29

Controlling inflation

Question 30

Why does the bank of England change interest rates

Answer 30

In order to stimulate economic activity or control inflation

Question 31

Which sector of the bank of England controls monetary policy

Answer 31

The Monetary Policy Committee (MPC)

Question 32

What are the two ways in which the bank of England ensures financial stability

Answer 32

Preventing financial crises
Acting as a lender of last resort

Question 33

How does the bank of England prevent financial crises

Answer 33

Works with other regulatory bodies such as the PRA to ensure financial institutions are operating safely

Question 34

How is the bank of England a lender of last resort

Answer 34

They provide emergency liquidity to financial institutions to prevent systemic failures

Question 35

How does the bank of England manage government debt

Answer 35

Involves overseeing the issuance of government bonds and managing the governments cash balances

Question 36

How does the bank of England supervise banks

Answer 36

Through the PRA, ensuring financial institutions adhere to regulatory requirements

Question 37

How does the bank of England maintain payment systems

Answer 37

Regulates key infrastructure like the RTGS system, which processes large value transactions

Question 38

How does the bank of England support the governments economic policies

Answer 38

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

Question 39

What is the equation for calculating bond yield

Answer 39

Rate of interest/price of bond x 100 = Yield