Financial Markets Flashcards
What are the Financial Markets?
Any place where buyers and sellers meet to trade financial assets.
What is the role of financial markets?
To bring lenders and borrowers together.
Who are Lenders?
Those who have excess cash, i.e. savers and investors.
Who are Borrowers?
Those who need cash right now but don’t have any, i.e. individuals, firms and gov’ts.
What ways can lenders lend through?
- Bond Markets
- Stock Markets
- Financial Intermediaries
How do lenders lend through Bond Markets?
Lenders can go to the “debt management office” and buy UK Gilts (gov’t bonds) or buy corporate bonds off the bond markets to finance gov’t and firms - Debt Capital.
How do lenders lend through the Stock Market?
Lenders can buy shares in companies in order to finance them (as well as being a stakeholder in the company) - Equity Capital.
What is the Primary Objective for financial intermediaries?
Profit: the difference between the rate of interest given to lenders and recieved from borrowers.
Which Financial Institutions are Intermediaries?
- Commercial banks
- Investment banks
- Hedge funds
- Pension funds
- Mutual funds
How do Commercial banks work as intermediaries?
- Lenders save their money in a deposit in commercial banks where they recieve interest.
- The bank will then create a loan equal to the savings deposit and lend it out to borrowers.
- These borrowers then pay a higher rate of interest on the loan than what the lender is recieving from saving.
- The difference between the two rates of interest is the return for the intermediary.
- These borrowers then pay a higher rate of interest on the loan than what the lender is recieving from saving.
- The bank will then create a loan equal to the savings deposit and lend it out to borrowers.
How do Pension funds work as intermediaries?
- Pensions take large sums of money from investors saving for their retirement.
- They then invest it into stock markets.
- When pensions reach the pension age they recieve annuity.
- They then invest it into stock markets.
How do Hedge funds and Mutual funds work as financial intermediaries?
- Take lots sums of money from investors and buy huge amounts of debt from borrowers.
- They then charge interest on debt repayments from borrowers and give a rate of return to investors.
- Interest rate they collect from borrowers will be > the rate they pay back to investors - profit.
- They then charge interest on debt repayments from borrowers and give a rate of return to investors.
What is the difference between hedge funds and mutual funds?
Hedge funds engage in riskier leverage deals which, if go wrong, have huge consequences whereas mutual funds don’t. Hedge funds are more regualted than mutual funds.
