financial markets and monetary policy

Question 1

what are the four key roles of financial markets?

Answer 1

• allocation of capital
• risk management
• price discovery
• economic growth

Question 2

what are the key functions of money?

Answer 2

• facilitating exchange
• unit of measurement
• store of value
• standard for debt settlement

Question 3

what are financial markets?

Answer 3

places where buyers and sellers come together to trade financial assets

Question 4

what are the key functions of money?

Answer 4

• medium of exchange
• unit of account
• store of value
• standard for debt settlement

Question 5

what are the key characteristics of money?

Answer 5

• hard to counterfeit
• durable and portable
• acceptable when making transactions
• holds value over time

Question 6

what is the difference between debt and equity?

Answer 6

• debt represents borrowing by individuals or organisations
• equity represents ownership in a business or an asset

Question 7

what are leveraged loans?

Answer 7

loans provided to companies with a high level of debt compared to their equity

Question 8

what are the key characteristics of leveraged loans?

Answer 8

• high debt-to-equity ratio: the company borrowing the loan has a high amount of debt compared to its equity, making it riskier for lenders
• floating interest rates: the interest rates on leveraged loans are often variable, which means they can change over time
• higher risk: leveraged loans carry a higher risk of default, which is why they often have higher interest rates and fees than traditional loans

Question 9

what is the money supply?

Answer 9

refers to the total financial assets functioning as money within an economy

Question 10

what is narrow money?

Answer 10

• represents the most liquid components of the money supply
• includes physical currency and checking deposits in banks
• used for day-to-day transactions

Question 11

what is broad money?

Question 12

what are the three main financial markets?

Answer 12

• the money market
• the capital market
• the foreign exchange market

Question 13

what are creditors?

Answer 13

individuals or businesses that lend money to a firm

Question 14

what are market interest rates?

Answer 14

the cost of borrowing money or the return on savings

Question 15

what are bond prices?

Answer 15

the amount investors are willing to pay for government bonds

Question 16

what is the maturity of a bond?

Answer 16

the date of expiration of the bond - at maturity, investors receive the full nominal value of the bond

Question 17

what is the relationship between interest rates and bond prices?

Answer 17

inverse relationship: when interest rates rise, bond prices fall - and vice versa

Question 18

what are the characteristics of a bond?

Answer 18

• maturity date/repayment date
• coupon
• bond price
• issue date

Question 19

what is the money market?

Answer 19

• a financial market for short-term, highly liquid debt securities
• it includes instruments like treasury bills, commercial paper, and certificates of deposit
• participants include banks, financial institutions, and corporations seeking short-term financing or investments

Question 20

what is equity finance?

Answer 20

finance from shareholders through the issue of new shares/stock which carry ownership

Question 21

what is debt finance?

Answer 21

borrowing money - requires paying interest (on loans) and may also need security

Question 22

what are hedge funds?

Answer 22

an investment instrument which pools money from a group of investors, and uses various investment strategies to generate returns