Financial Markets And Monetary Policy Flashcards
Characteristics of money
- durable (lasting)
- portable
- divisible
- hard to copy
- accepted by the population
- valuable - holds value
Key functions of money
- medium of exchange
- store of value
- unit of account
- standard of deferred payment
What is narrow money
The coins and notes in circulation
What is broad money
A measure of the total amount of money held by households and companies in the economy
What is the money market
A market for short term loan finance for businesses and households
(Includes inter-bank lending)
What is the capital market
Market for medium-longer term loan finance (where securities such as shares and bonds are issued)
What is the foreign exchange market
A market where currencies (foreign exchange) are traded
What is the spot exchange rate
The price of a currency to be delivered now, rather than in the future
What is the forward exchange rate
A fixed price given for buying a currency today to be delivered in the future
Role of financial markets in the wider economy
- facilitate saving
- lend
- facilitate exchange of goods and services
- provide forward markets in currencies and commodities
- provided a market for equities
What is debt financing
Borrowing money from an outside source with the promise of paying back the borrowed amount, plus the agreed-upon interest, at a later date
Key features of bank loans
- loan provided over a period
- rate of interest is fixed or variable
- timing and amount of loaned are set by the lender
- usually some security required
- unsecured loans have higher interest rates (risk)
What is a non performing loan
When the borrowed is unable to repay some or all of the debt
What are Bank overdrafts
Short-term finance - the bank lets the business owe it money when the bank balance goes below zero
When are Bank overdrafts useful
To help a business handle fluctuations in their cash flow or when the business runs into short term cash flow problems
Advantages of debt finance
- less capital required to be invested by the shareholders
- debt can be a relatively cheap source of finance compared with dividends
- easy to pay interest if profits and cash flows are strong
Disadvantages of debt finance
- businesses vulnerable to changes in interest rate
- businesses have less control of events if they are highly geared i.e. have a high ratio of debt to equity
What is equity financing
Raising capital by selling shares of a business to investors
Advantages of equity finance
- risk capital and does not offer a fixed return
- equity finance gives a business more flexibility
Disadvantages of equity finance
- dilution of ownership
- requires a higher return than debt because it is risk capital
- growing expectations over time that dividends will be paid
What are government bonds (treasuries)
Fixed interest securities
What is the maturity date for a bond
When the bond becomes due to be repaid to whoever owns it at the date of maturity
What is a coupon
Th government pays a fixed annual interest to investors
What is the yield on bonds
The interest rate on a bond - it will vary inversely with the market price of a bond
What happens to yields when bond prices are rising
The yield will fall
What happens to the yield when bond prices are falling
Yields rise
