Structure of financial markets and assets

Question 1

What are the four functions of money?

Answer 1

• medium of exchange
• measure of value
• store of value
• standard of deferred payment

Question 2

What are the 6 characteristics of money?

Answer 2

• acceptable
• durable
• portable
• divisible
• scarce
• difficult to forage

Question 3

What is the money supply?

Answer 3

quantity of money in existence in an economy

Question 4

Notes and coins represent how much of entire money supply?

Answer 4

2%

Question 5

What is narrow money?

Answer 5

• cosnists of notes, coins, current accounts

Question 6

What is broad money?

Answer 6

consists of all of narrow money and other deposits

Question 7

What are financial markets ?

Answer 7

markets that exist to shift money from those with a surplus of money which they do not wish to spend to those who wish to spend more then they currently have

Question 8

What are the three main financial markets ?

Answer 8

• money market
• capital market
• foreign exchange market

Question 9

What is the money market?

Answer 9

provides short term finance to individuals, firms and governments

• mainly short term debts (hours to motnhs)

Question 10

What does the money market also include?

Answer 10

interbank lending and money lent to governemnt through treasury bills

Question 11

What is the capital market?

Answer 11

deals with medium and long term finance to firms and governments

Question 12

How does the capital market work?

Answer 12

• raises finance through share or bond issue

Question 13

What are the two parts of the capital market?

Answer 13

primary and secondary market

Question 14

What is the primary market?

Answer 14

• deals with issue of new bonds and shares by firms or gov to raise finance

Question 15

What is the secondary market?

Answer 15

deals with trade in bonds and shares already issued (world stock markets )

Question 16

What is the foreign exchange market?

Answer 16

international trade and investment flows involve converting anf holding differant currencies

Question 17

What are the two types of foreign exchange transactions?

Answer 17

• spot market and forward market

Question 18

What is the spot market?

Answer 18

conversion of currancies at the current market rate

Question 19

What is the forward market?

Answer 19

agreement to buy currency at some future date at an agreed price

Question 20

What are the three roles of financial markets in the wider economy?

Answer 20

• governments often finance deficits by issuing bonds
• large fimrs use capital markets to raise large amounts of money
• capital markets ensure finance is available for firms to maximise profit

Question 21

What is equity?

Answer 21

share capital issues by firms

Question 22

Explain bonds?

Answer 22

• issued by firms/ gov to borrow money
• pay fixed rate of interest ( coupon) and have a fixed maturity date

Question 23

Coupon definition?

Answer 23

the interest on a bond

Question 24

Maturity date definition?

Answer 24

date of repayment for a bond

Question 25

What are gilts?

Answer 25

government issue fo bonds to finance deficit

Question 26

What is the main determinate of the price of bonds?

Answer 26

current interest rate

Question 27

What relationship do interest rates and bond prices have?

Answer 27

inverse

Question 28

How do you calculate bond yeild?

Answer 28

coupon / market price x100

Question 29

What is the bond yeild?

Answer 29

the return on a bond

Question 30

What are bond yeilds determined by?

Answer 30

• expectations of future interest rate (if interest rates are expected to go up, price would fall)
• price of bonds determined by how near maturity is

Question 31

What are open market operations?

Answer 31

refers to central bank buying or selling short term bonds in open market to effect money supply

Question 32

What is the reserve requirement?

Answer 32

the percentage of deposits made by customers at the bank that the bank must hold

Question 33

What is the discount rate?

Answer 33

the rate at which the central banks charge the commericial banks for borrowing

Question 34

What factors effect money demand?

Answer 34

• rate of interest on loans
• number of transactions we plan to make
• changes in gdp
• rate of anticipated inflation

Question 35

Advantages of debt financing?

Answer 35

• less capital required to be invested by shareholders
• easy to pay interest if profit + cashflow strong
• debt can be a relatively cheap source of finance compared to dividends

Question 36

disadvantages of debt finance?

Answer 36

• can become vulnerable to unexpected interest rates
• business can have less control if highly geared

Question 37

Advantages of equity finance?

Answer 37

• does not have to be repaid
• does not offer fixed return, business have more control of when to pay back
• gives business more flexibility

Question 38

Disadvantages of equity finance?

Answer 38

• dilution of ownership for founders
• equity requires higher return then debt