Intro to financial system Flashcards
Give 3 ways to finance a business.
Which option is most commonly used.
1) Equity: Selling of shares
2) Debt: Take on debt through loans etc.
3) Use retained earnings to reinvest money into the business.
Option 3 is the most commonly used.
Give 3 roles of a financial manager.
1) Interacts with capital markets: Companies raise capital in financial markets by selling financial assets such as stocks, bonds etc.
2) Invests in real/physical assets: Uses cash from financial markets to invest in these.
3) ‘Dividend decision’: Decides what to do with profits. Their are 2 options - (A) Pay shareholders w/dividends or (B) Use retained earnings to reinvest profit back into the business.
What are financial intermediaries?
Give 3 types.
Financial intermediaries: Help primary investors (Households and individuals) invest in business.
Three types are:
1) Brokers - Investors are the broker’s clients. The broker seeks out businesses to invest in and advises clients on various investment options.
2) Asset transformers: Provides accounts for primary investors and lends money to businesses
3) Financial markets: Allows investors to easily find and purchase shares, bonds etc from businesses.
Primary market - investors buy business’ financial assets from the business. Secondary market - investors buy business’ financial assets from each other.
Name and explain ? types of banks.
How do banks make a profit?
Banks:
-Allow depositors to open an account w/the bank. They pay depositors at a low interest rate
-Banks use depositors money to give loans to business’ and individuals. These loans are charged at a higher interest rate.
-The difference between the high interest rate charged on loans and the low interest rate paid to depositors is the profit that the bank makes.
What is the money supply?
What problems can arise if it’s uncontrolled?
Money supply: The amount of money in the economy. About 96% is in deposit liabilities. Other 4% is in circulation.
Too much money in the economy can lead to inflation, too little money in the economy can lead to deflation.
What term is used to describe how the money supply is controlled and what method is used to control it?
Monetary policy is the way in which a central bank controls the amount of money in the economy. Central banks can do this by conducting open market operations. This involves either selling bonds to banks in order to increase the money supply or buying bonds from banks in order to decrease the money supply. The former helps fight deflation while the latter helps fight inflation.
What is the reserve ratio and why is it implemented?
Reserve ratio: Banks must keep a certain percentage of a depositor’s funds in cash at all times. They are allowed to keep more than this percentage in the bank at any time BUT they must not go under this figure.
This rule helps stop bank runs from occurring. A bank run is when many depositors ask to withdraw money from the bank at the same time. If the bank doesn’t keep a reserve ratio on their accounts, they can run out of money and go into default.
What are financial markets. Name 2 types.
Financial markets: Markets where financial assets such as stocks and bonds are sold. Their are two types:
1) Capital markets - Sources of long term finance such as shares and bonds
2) Money markets - Sources of short term finance such as bills.
