lesson 7: financial markets Flashcards
what are the four functions of money?
medium of exchange - pay for goods and services without a barter
store of value - provides future purchasing power wen stored
unit of account - allows us to compare relative values
standard of deferred payment - (credit) allows people to delay payments of goods
what is narrow money?
cash and bank deposits
what is broad money?
other financial assets that store value
what is an asset?
what is a liability?
asset is what we own
liability is what we owe
whats the most important non financial asset?
house
what is a financial market?
what is a money market?
what is a capital market?
where financial securities are bought and sold
where short dated securities are dated
where public limited companies (PLCs) can raise funds to finance their long term growth and where governments can sell bonds to finance a budget deficit
what is the six roles of the financial markets?
saving
lending
facilitating the exchange of goods and services
providing forward markets - can buy and sell at a later date in the future
providing a market for equities - large firms can issue shares but people will only buy them if they can sell them in a stock exchange
providing insurance
what is a share?
financial assets sold by companies to raise financial capital. holders own a part of the enterprise and may receive a share of profits
what are corporate bonds?
debt issued by a company and sold to people as a long term loan
a way for companies to borrow money. when a company needs money. it issues bonds. investors buy these. in return the company promises to pay back the money later on with interest (the coupon)
what is a government bond?
debt issued by the government and sold to people as a long term loan
what is the difference between a primary and secondary market?
primary = new issue —> shares that are sold directly to the public by investment banks
secondary = second hand trading
what does the secondary market allow for?
enables those holding shares or bonds to quickly and easily convert them to cash
what type of market is the foreign exchange markets?
financial markets
what is the difference between a spot market and a forward one?
spot market needs to be paid immediately
forward market means you can pay at a later date
what are the five causes for financial market failure?
asymmetric information - complex products makes it difficult for buyers to understand what they’re buying
moral hazard - banks may take excessive risk if they know they’re too big to fail or because of the governments support
speculation - asset bubbles form as speculators are attracted to rising prices
market rigging - individuals or institutions may be tempted to collude to fix prices or exchange information
externalities - when things go wrong in the financial market it comes with knock on effects
