MACRO Financial Markets Flashcards
Define liquidity
Liquidity - the ability to turn an asset into cash without loss
of value
Define assets
Asset -what someone owns.
Define liability
Liability - what someone owes.
Define equity
Equity - How much a shareholder has put into a firm or the % they own
Define security
Securities - Assets that have monetary value that can be traded, bought and sold
Define shares
Shares-one of the equal parts into which a company’s capital is divided, entitling the shareholder to a proportion of the profits.
Define cooperate bonds
Corporate bonds-financial securities sold by corporations and the owners become creditors
Define government bonds
Govt bonds (gilts)-financial securities sold by govts and the owners become creditors
What are the key functions of money
- Medium of exchange: money allows goods and services to be traded without the need for a barter system. Barter systems rely on there being a double coincidence of wants between the two people involved in an exchange
- Store of value: this can refer to any asset whose “value” can be used now or used in the future i.e. its value can be retrieved at a later date. This means that people can save now to fund spending at a later date.
- Unit of account: this refers to anything that allows the value of something to be expressed in an understandable way, and in a way that allows the value of items to be compared.
- Standard of deferred payment: this refers to the expressing of the value of a debt i.e. if people borrow today, then they can pay back their loan in the future in a way that is acceptable to the person who made the loan.
What is a financial market
A financial market is any exchange that facilitates the trading of financial instruments, such as stocks, bonds, foreign exchange, or primary commodities such as oil and gas.
What are the benefits of bank loans?
• Greater certainty of funding, provided terms of loan complied with
• Lower interest rate than a bank overdraft
• Appropriate method of financing fixed assets
What are the drawbacks of bank loans?
• Requires security (collateral)
• Interest paid on full amount outstanding
• Harder to arrange
• Startups and small businesses often excluded
What is a bank overdraft
• Short-term finance, widely used by businesses of all sizes
• An overdraft is really a short-term facility - the bank lets the business “owe it money” when the bank balance goes below zero
• A flexible source of finance: only used when needed
• Excellent for helping a business handle seasonal fluctuations in cash flow or when the business runs into short-term cash flow problems (e.g. a major customer fails to pay on time
Benefits of a bank overdraft
• Relatively easy to arrange
• Flexible - use as cash flow requires
• Interest - only paid on the amount borrowed under the facility
Drawbacks of a bank overdraft
• Can be withdrawn at short notice
• Interest charge varies with changes in interest rate
• Higher interest rate than a bank loan
Define equity finance
Equity financing means raising capital by selling shares of a business to investors
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
- Business may be vulnerable to unexpected changes in interest rates e.g. when the central bank decides to tighten monetary policy
- Businesses have less control of events if they are highly geared i.e. have a high ratio of debt to equity
Advantages of equity finance
- Equity is risk capital and does not offer a fixed return - business has some control over when if to pay a dividend to investors
- Equity finance gives a business more flexibility e.g. raising fresh equity capital at different stages of the business development
Disadvantages of equity finance
- Dilution of ownership for the original founders
- Ultimately, equity requires a higher return than debt because it is risk capital (investors can lose their money)
Growing expectations over time that dividends will be paid
What is a bond?
• A bond is an I.O.U. It pays a fixed interest (coupon) annually with a promise to repay the full nominal value of the bond at a future date. o Issued to raise finance
O Govt bonds (GILTs)
O Corporate bonds
Why do we buy bonds?
a Generally safer (GILTs)
O During a period of downturn, good place to put money that’s low risk
• Marginally higher rate of interest than a savings account but.
o Ties up money for a long period of time a Low returns compared with other investments
Define yield
Yield- the annual interest payment or
Coupon as a % of the market price of a bond
Yield equation
Yield= annual coupon payment /
current market value x100
