Financial markets and Financial assets pt3 Flashcards
Money markets
Markets where highly liquid, short-term (maturing between a day and a year) financial assets are traded. These include commercial and treasury bills.
Foreign exchange markets
The largest markets in the global economy and where currencies are traded by large international banks, either for immediate exchange(spot markets) or for an agreed future exchange (forward markets).
Capital markets
For medium to long term financial instruments. This is where PLC’s (public limited companies)raise finance by issuing shares and bonds; where these are sold on and the government raises finance by issuing bonds (to finance a budget deficit for example.)To do this, the shares and bonds need to be attractive to investors.
Bond yield
Bonds are fixed interest securities. The interests are called coupons and are usually paid in 2 instalments every 6 months. The yield of a bond is a measure of how much it pays out compared with its current market value.
Yield=(Annual coupon payment/current market price) x 100
Bond yield vs bond price
They have an inverse relationship e.g. higher bond price = lower bond yield
Maturity
A bonds issue and maturity price are the same (you can redeem a £100 bond from 1975 for £100 in 2025). Bonds are a low risk investment as there is guaranteed interest. The market price of the bond fluctuates but goes to issue price at maturity as no one wants to pay more for a bond that will stay the same price or regress in price.
Speculation-A self fulfilling prophecy
Traders buy or sell depending on what they think will happen. It they expect a bond/share to rise they will buy now. If lots of other traders think the same they will also buy so the price increases (self fulfilling prophecy) and vice versa.