Saving & Borrowing Flashcards
Chapter 2/8
What can the financial sector be viewed as?
Linking savers with borrowers.
What are savers?
Including HNWI’s
Individuals, companies or governments with a surplus of money. Those with substantial amounts of surplus money are ‘High Net Worth Individuals’
What are borrowers?
Those with a need for money
How is the link between savers and borrowers provided?
3 ways
Banks, equity & bonds
How do banks operate?
Deposits & Loans.
Savers deposit surplus money at the bank. The banks pays interest on this. The banks lend the deposited money on to borrowers. The bank charges them interest (higher) on the loans. By recieving a higher interest than it pays, the bank generates a** surplus**. It’s various costs are paid for with this surplus such as staff wages, taxes, maintenance from this surplus. What is left after deducting these costs is profit.
What is equity?
Also referred to as share or stocks, it is an ownership stake. If a business is set up as a company, it can raise money by selling shares.
Essential difference between equity and borrowing?
There is no interest paid on equity and equity does not need to be repid. This is the opposite for borrowing.
What are bonds?
‘IOUs’. These are issued directly to the investors. Borrowing money issuing bons is a form of debt on which the borrower will pay interest and which needs to be repaid.
Why do governments borrow?
Governments collect money through taxes to spend on a variety of items. In some cases, government expenditure exceeds government revenue.The difference is financed typically through reguar issues of bonds. For example, in summer 2022, the UK had outstanding bonds of £2.4 trillion. This is nown as the country’s national debt.
What is the relationship between risk and reward?
Higher risk. Higher reward.
3 ways equities are different from bonds?
- Equities give the holder an ownership stake in the issuing company. Bonds do not.
- Equities have no set date of repayment. Bonds typically have a set repayment date
- Equities do not pay interest. Bonds typically do pay a specific percentage interest pa.
Why are investors willing to put money into equities when the issuing company may not buy the equity back?
- A share of profits made might be paid to shareholders through dividends.
- Holders of equity know they are able to sell the equities they own to someone else. This enable the sellers to realise their investment, potentially for more money than they paid for the shares.
What are the facilites to sell equity?
Equity markets. These include exchanges like LSE, NYSE, SSE, ADX, TSE and more. They trade millions o shares every day. It started off as a meeting place for buyers and sellers (or representatives).. to agree purchase and sales. Now, majority of deals are made electronically, most essentially operate as electronic auction facilities similar to eBay.
What are the facilities to sell bonds?
Bonds can be bought and sold, but they tend to do so away from the big exchanges. This is due to the fact that nearly all bonds have a maturity date when the IOU will be repaid. The buyers of bonds and sellers of them are brought together via electronic facilities described as over-the-counter (OTC) facilities. (Term for trades arranged away from established exchanges directly or via an intermediary).
What does the financial sector include in managing financial risks?
Insurance providers. The insurance company will take on specified risks in exchange for a series of premium payments. If the risk materialises, the insurance company will pay out.
What is reinsurance?
Insurance taken out by an insurer so the risk can be shared since sometimes it may be too big for just them to bear alone.
What is foreign exchange?
Also known as Forex or FX, is when dealers exchange currency for another to facilitate international trade.
