financial sector + markets

Question 1

what are dividends

Answer 1

a sum of money paid regularly by a firm to its shareholders out of its profits

Question 2

two ways in which firms fund activities

Answer 2

• equity finance: raised by selling shares
• debt finance: borrowing money eg from banks, or issuing corporate bonds

Question 3

importance of financial sector regarding growth

Answer 3

• growth driven by individuals + firms spending, this often relies on credit
• businesses struggle to grow without credit, this means fewer new jobs and lower exports
• eg firms in developing countries where sector is often weak struggle to get credit, restricts their growth

Question 4

what makes bank different from other private-sector organisations

Answer 4

they have to be regulated as greater profit is often linked to taking risks
- there’s incentive to take risks

However they have power to destabilise economies
- so we regulate them and control their behaviour

this also helps to maintain confidence and prevent sudden panics

Question 5

what are money markets

Answer 5

• provide short term finance to banks, individuals, governments and firms
• involves borrowing and lending with repayment period of up to a year
• considered short term

Question 6

what are capital markets

Answer 6

provide governments and firms with medium and long term finance

• can do this by issuing bonds + firms can issue shares or borrow from banks

Question 7

two parts of capital markets

Answer 7

• primary markets: new share/bond issues
• secondary markets: existing securities are traded. Increases their liquidity (you can sell them so it’s easier to turn them into cash)

Question 8

securities meaning

Answer 8

certificate with financial value that can be bought + sold

eg shares + bonds

Question 9

what are forex markets

Answer 9

different currencies are bought and sold, done to allow international trade, or speculation (making money on currency price fluctuations)

Question 10

forex market two sides

Answer 10

spot market: for transactions that happen now

forward market: for transactions that will happen at agreed date in the future

Question 11

what are bonds + how they work

Answer 11

investors buy bonds at their nominal (‘face’) value and become bondholders

• interest is paid to the bondholder in form of ‘coupons’
• after being issued, they can be traded on secondary capital markets at any price regardless of its nominal value
• bonds yield is the annual return for investors. The less you pay for it, the higher its yield

Question 12

formula for bond yields

Answer 12

yield: coupon/market price X 100

Question 13

what happens when a bond matures

Answer 13

the bondholder is paid the nominal value of the bond by the issuer