financial markets Flashcards
what is a liability
things which people or organisations owe
what is an asset
things which people or organisations own
what are the functions of money?
- medium of exchange (universally accepted)
- measure of value (allows people to compare the relative values of goods and services)
- store of wealth (inflation makes it less useful at this)
- standard of deferred payment (it is a useful method of measuring debt)
what is narrow money
cash (notes and coins) along with bank deposits with the Bank of England
what is broad money
cash and instant access bank and building society deposits along with less liquid assets such as some short-dated bonds
what is the money market used for?
Trading of short-dated financial assets such as cash, short term loans and short dated bonds that are about to mature.
- banks and other financial institutions lend on the money market
what are capital markets used for?
used by PLCs and the Government to raise finance for the long term
- Primary market is where new shares in PLCs are sold
- Second Market is for second hand shares and bonds
what does equity mean in financial terms?
wealth
when will the price of shares go up on the stock market?
When demand exceeds supply- usually when a firm is expected to make high profits in the near future
what are corporate bonds?
debt security issued by a company and sold to individuals or financial institutions who lend long-term to the company
what are yields?
the return an investor expects to receive each year over its term to maturity.
relationship between price of bond and yield of bond
it is inverse.
- if yields generally rise, interest rates throughout money markets are likely to rise
- if yields on bonds fall, interest rates are likely to fall as yields on bonds set the benchmark for interest rates in money markets
equation for bonds
market price = (coupon ➗yield) x100
what are the main functions of the Bank of England
- To help the Government achieve macro-economic stability (they may buy and sell foreign currencies to influence the exchange rate and also use the monetary policy)
- implement monetary policy
- maintaining financial stability (lender of last resort in attempt to prevent systemic risk)
- Government’s bank (collects tax revenues and distributes these to the various Government Departments to cover Gov spending)
what are commercial banks
retail and high street banks in the UK that deal with members of the public and most small and medium sized businesses
what do commercial banks do?
- accept deposits from the general public
- create deposits which re lent to customers who wish to borrow
how do banks make profit?
charging for services and charging borrowers a higher rate of interest than they pay savers for their deposits
what do investment banks do?
don’t generally take deposits from ordinary citizens but offer a range of financial services to large businesses
- help businesses raise funds
- help businesses buy businesses
problems of investment banks
suggested that retail banking activities should be done separately from the riskier investment banking activities.
Retail Banks could be short of cash due to their derivative market meaning they are at risk of a run in the bank
what is the credit multiplier
a measure of the extent to which the creation of money in the banking system causes the growth in the money supply to exceed growth in the monetary base
effect of reserve requirement on money multiplier
the smaller the money multiplier the bigger the money multiplier
equation for total bank deposits
total bank deposits = initial deposit ➗reserve requirement
what would be the effect of a collapse in the banking sector on the wider economy?
there would be a massive collapse in aggregate demand and a huge recession
what is financial regulation?
imposing rules and sometimes laws which limit the freedom of banks and other financial regulations
