financial markets Flashcards
the four functions of money
medium of exchange
measure of value
store of value
method of deferred payment
money as a medium of exchange
would have to barter without it
easily facilitates the exchange of goods as no double coincidence of wants is needed
money as a measure of value
helping consumers and producers make informed decisions and facilitating agreeable exchanges between buyers and sellers.
money as a store of value
holds its value over time, allowing it to be saved and remain useful for exchange, though inflation can affect its value.
money as a method of deferred payment
facilitates credit by enabling terms for loans and future debt settlements, allowing goods to be acquired now and paid for later.
the characteristics of money
acceptability
portability
durability
scarcity
uniformity
divisibility
the characteristics of money: divisibility
currency must be divisible
the characteristics of money; acceptability
currency must be valued and widely accepted as meth to pay
the characteristics of money: durability
must not be easily defaced or destroyed
the characteristics of money: scarcity
must remain desirable and retain value
oversupply will decrease its worth
the characteristics of money: uniformity
each denomination must be the same
the characteristics of money: portability
easy to carry
what is money supply
total amount of money available in an economy at a specific time.
eg cash and deposits
narrow money
part of money supply made up of cash and liquid assets
broad money
M1 plus less liquid assets like savings accounts, time deposits, and money market funds.
What is liquidity
how easily assets can get turned into cash
financial markets
a place/system that provides a place to exchange goods and services
role of financial markets
Facilitate saving
lend to businesses and indvdls
Facilitate exchange of goods and services
Provide forward markets in currencies and commodities
Provide market for equities
three types of financial markets
money market
capital market
FEX market
the capital market
provide medium-long term finance
eg corporate and government bonds
what are government bonds
debt securities used by gov and sold to indvdl
what are corporate bonds
debt securities issued by companies to raise capital
what is the money market
short term finance (less than 1 year)
eg commercial bills issued by private businesses
treasury bills issued by gov
what is the FX market
trade currencies
central banks, commercial banks, investors and indvdls are participants in this market
what is debt
liability that represents what firm owe
what is equity
all physical and financial assets owned by firm
difference between debt and equity
DEBT: no ownership rights, money must be paid back w interest and no voting rights
EQUITY: shareholders have ownership rights, shareholder get profit through dividends,
shareholders have voting rights
what are interest rates
costs of borrowing money or return on savings
what are bond prices
amount investor are willing to pay for government bonds
nominal value of bonds
bonds that investors buy at face value
coupon of bonds
guaranteed fixed annual interest payment to the investor
what is the maturity of bonds
date of expiration of the bonds
more than a year
leads to investment being illiquid
relationship between bond prices and interest rates
as interest rates rise bond prices fall
(greater ROI)
as interest rates fall bond prices rise
(lower ROI)
how to calculate yield
annual coupon payment/ current market price x100
what are commercial banks
retail banks serve the general public but personal customers and businesses
what are investment banks
global banks that assist n raising finance for companies
characterstics of commercial banks
provides loans eg mortgages
provide safe keeping for returns for deposits/ savings
examples of commercial banks
Barclays
Natwest
HSBC
network of commercial banks
in high streets and shopping centres
characteristics of investment banks
issue shares and bonds
financial advisory services to businesses
advice for companies undergoing mergers r acquisitions
examples of investment banks
jp morgan
morgan stanley
citigroup
investment bank branch network
situated within the square mile of the city of london
structure of commercial banks balance sheet
show assets and liabilities
what objectives do commercial banks face challenge trying to balance
liquidity
security
profitability
the money creation process fractonial banking
Initial Deposit: A customer deposits $100 into a bank.
Reserve Requirement: The bank retains a portion (e.g., 20%) as reserves, keeping $20 and making $80 available for lending.
Lending and Loan Creation: The bank lends out the remaining $80 to borrowers.
Deposit Expansion: Borrowers deposit the $80 into their own accounts, which other banks can use as a basis for further lending.
Money Supply Expansion: This cycle repeats, multiplying the original deposit into new loans and deposits, expanding the total money supply across the banking system.
monetary policy actions
interest rates
exchange rates
money supply
forward guidance
factors to consider when setting bank rate
economic expansion- high EG low unemployment increases AD, central bank initiates contractionary monetary policy)
economic contraction- recession decrease in AD bank initiates expansionary monetary policy
the instruments of monetary policy is
quantitative easing
incremental adjustments
impact of a decrease in interest rates
exchange rates fall
UK exports get cheaper
impact of an increase in interest rates
exchange rates rise
UK exports become more expensive
using interest rates to lower inflation on graph if inflation high
contractionary monetary policy shifts AD to the left
cus interest rates affect the components
using interest rates to increase inflation if too low
decrease interest rates
go through demand side expansionary policy shifts AD to right
stimulates the AD components
UK regulatory bodies
The prudential regulation authority (PRA)
The financial policy committee (FPC)
THE Financial conduct authority (FCA)
The Prudential Regulation Authority (PRA)
creates regulations for banks, insures
helps to avoid insolvency of bank
make sure they adhere to rules and regulations
The financial policy committee
to create financial stability
identify, track and address risks to financial system in the uk
the financial conduct authority (FCA)
regulate financial srvices firms and financial markets
ensure they are operating fairly and in the best interest of consumers
why banks might fail
regulation violation
high-risk loans
speculation and market bubbles
asymmetric information
why are banks required to meet capital and liquid ratios
to evaluate their capacity to manage unexpected shocks
liquidity ratio
is the ratio of the banks’ cash and other liquid assets to its deposits
measures banks ability to cash needs
what is capital ratio
amount of capital on a banks balance sheet as a proportion of its loans
to identify the risk associated with lending
what is moral hazard
when banks indulge in risky behaviour
what is systemic risk/failure
when a minor problem in one countrys financial sector has international consequences
that can even break the entire financial system
