financial markets flashcards
functions of money
accepted as a medium of exchange
store of value ( cant deterioate over time)
measure of value,( diff prices, goods different )
standard of deffered payment ( people can borrow money over time, lenders and borrowers)
characteristics
- acceptable
- portable
- durable
- devisable
- limited in supply ( keeps its worth )
- difficult to forge ( avoid loosing faith in money)
commodity vs fiat money
commodity -any money that has intrinsic value- gold
fiat -notes/ coins, no intrinsic value
broad vs narrow money
M0- narrow and highly liquid measure of the money supply involves all cash , notes in the economy and deposits in bank accounts
M1-M4 less narrow - broad, adding more non-financial assets to the money supply, still relitively high liquidity can turn into cash within 5 years
financial markets
where buyers and sellers come together to trade financial assets
money market
buying and selling of financial assets that have a maturity/payback of less than one year e.g. corporate bonds, gpvernment bonds, interbank lending- LIBOR
capital market
buying and selling of financial assets which have a payback of more than one year- less liquid
debt capital
any financial asset that requires interest repayments for borrowing, e.g. owners of gov bonds are payed coupon payments, people who borrow from the bank pay bac interst payments - money that must be repaid over time along with interest payments, no ownership but have claim on assets incase of bankrupsy
low risk, fixed returns
equity capital
this is high risk, no repayment.
ownership of the business therefore entitles to a share of the profits- in the form of dividens, payed by issuer
primary vs secondary capital markets
primary- new bonds/ shares issued via the debt management office in the UK investment bank/ stock exchange
secondary- new bonds thta have been bought and sold again/ shares , investment bank/ stock exchamge
currency markets
- spot markets, buy currency immediately and recieve ummediatlry at current exchange rate
-futures markets, buy currency at current exchange rate and recieve at a later date prehaps if sspeculate a depreciation in currency
foreign exchange markets
currency bought and sold, facilitates international trade and investment
role of financial markets in the wider economy
- faciliate saving- store funds and rewards for saving
-lend to businesses / individuals
-faciliatate exchange goods and services
provide forward market in currencies and commodities- gold, wheat, oil
- provide a market for equitys- stock market
what is a commercial bank
manages cheques, deposits, savings accounts for individuals and firms. they can make loans using the money saved with them
what is an investment bank
facilitate the trade of stocks, shares and bonds and other forms of investment , have lower government regulation and business model meaning they have a higher risk tolerance
main roles of commerical bank
- accept saving deposits
- lend money to households and firms
-facilitate payments one party to another - act as finanical intermediates- moving funds from savers to borrowers - make a profit small rate of retuen on savings compared to IR charged on borrowers
-provide other services e.g. financial advice + indurance
objectives
liquidity- ease at ehich one can change assets into cash
-profitability- return on investment
-secutirty- ability to reduce risk, assets to secure loans
functions of a commercial bank
-accept deposits- accept deposits from public usually in the form of savings.
- people may save as they are on low income and it gives them security
banks need to meet different need and wants of different depositors- therefore provide different accoutns
- demand deposits, can be withdraw immediately, often firms that need to be able to quickly make immediate payments
-fixed deposits - thoes that cant withdraw any money for a fixed amount of time which have higher interest payments as the bank knows this money cant be withdrawn so can be used for loans
- saving deposits- withdraw at any time, often- but not always immediately. lower interest rates - generally thoes who recieve income
- provides loans- main source of income/ credit is from interest payments on loans as well as from depositers- usally fixed deposits
-some loans are secured against an asset e/g/ house incase not repaid
short term loans include: cash credit and loans on demand
- overdraft
- investment funds *
- agency functions *
commercial banks balence sheet
value of a companys assets, liabilities, shareholder/ owners equity ( retained profit/ reserves, money left over after assets are sold and liabilities paid ) at a given point in time- snapshot
assets = libailities + capital , must balence
examples of assets
most liquid-
cash
reserves BOE
interbank lending
ST investment- ST gov/ corp bonds
LT investment- above and shares
morgages, loans
fixed assets, machinery, property
least liquid-
liabilties
- deposits ( st liability)
and LT liabilties
capital
shareholder funds, retained profit and reserves
capital vs liquidity ratio
capital ratio- level of reserves compared to riskier assets it holds- low ratio= vunerable in event crisis- stress test
liquidity ratio- liquid assets held by a bank compared to overall assets
main roles of investment banks
provide range of services to their cusomers but dont accept savings deposits- JP morgan
roles:
- buying and selling of securities- shares/ bonds
-arrange issuing of bonds/ shares
-provide financial support for thoes who want to raise funds
- helping facilitate mergers and quaisitions
- create markets for trading of different securities - ensuring bonds and shares can be bought on behalf of lenders/ borrowers
new issues- issue bonds and shares, put people in contact, sell on behalf of issuers, make a profit
property trading- taking excess capital and investing recieving high rate of return- financial assets increasing profits
most often commercial and investment banks combine decreasing risk of systematic risk decreasing risk of bank failure
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