Role of Financial Markets

Question 1

What is the money market

Answer 1

Market for short term loan finance up to 12 months

Includes interbank lending and short term government borrowing

Question 2

What is the capital market

Answer 2

Market for medium and longer term loan finance

Market where securities such as shares and bonds are issued

Includes companies governments and non profits who raise money by issuing bonds

Question 3

What is the foreign exchange market

Answer 3

A marker where currencies are traded compiled up of thousands of trading floors

Question 4

What is the spot exchange rate

Answer 4

Price of a currency to be delivered now

Question 5

What is the forward exchange rate

Answer 5

Fixed price given for buying a currency today and delivered in the future

Question 6

What is a financial market

Answer 6

Any exchange that facilitates the trading of financial instruments such as stocks, bonds, foreign exchange, insurances or commodities

Question 7

Key roles of financial markets

Answer 7

Facilitate saving by businesses and households - secure place to store money and earn interest

Lend to businesses and individuals

Allocate funds to productive uses

Facilitate the final exchange of goods and services

Provide forward markets in currencies and commodities

Provide a market for equities

Question 8

Key functions of money

Answer 8

Medium of exchange
Store of value
Unit of account
Standard of deferred payment

Question 9

What is the money supply

Answer 9

Stock of currency and other liquid financial instruments circulating in the economy of the country at the particular point in time

Question 10

What is narrow money

Answer 10

Narrow money definition of the money supply is a measure of the value coins and notes in
circulation and other money equivalents that are easily convertible into cash such as short-term
deposits in the banking system

Question 11

What is broad money

Answer 11

Measure of the total money held by households and companies in the economy

Made up mainly of commercial bank deposits

Question 12

What does debt financing mean

Answer 12

Borrowing money from an outside source with the promise of paying back the borrowed amount, plus the agreed-upon interest, at a later date

Question 13

Key features of bank loans

Answer 13

Provided over a fixed payment
Rate of interest payable is either fixed or variable
Timing and amount of loans repayments are set by the lender
Non performing loans occur when the borrower is unable to repay some or all of the debt

Question 14

Main functions of a commercial bank

Answer 14

Provide retail banking services to households and business customers
Licensed deposit takers providing savings accounts
Licensed to lend money
Profit seeking businesses

Question 15

How do banks create credit

Answer 15

Extending loans to businesses and households

Question 16

How o commercial bank a make a profit

Answer 16

Interest rate spreads
Services fees
Brokerage percentages

Question 17

How can banks fail

Answer 17

Run on the bank
Credit crunch
High losses from bad debts

Question 18

Limits to credit creation by banks

Answer 18

Market forces
Regulatory policies
Behaviour of consumers and businesses
Monetary policy

Question 19

Liquidity risk for commercial, banks

Answer 19

Tend to attract short term deposits
Lend for longer periods of time
Bank may not be able repay all deposits if savers decide of withdraw their funds in one go
Commercial banks will try to attract long term deposits but hold some liquid assets

Question 20

Credit risks for commercial banks

Answer 20

Risk to a bank of lending to borrowers who turn out to be unable to repay some or all of their loans

Credit risk can be controlled by research into the creditworthiness of borrowers - minimum capital reserves may be imposed by the financial authorise