Structure of financial markets and financial assets Flashcards
what does money function as?
- medium of exchange or means of payment
-a store of value or store of wealth: an asset
-a measure of value
-a standard of deferred payment: repayments at a later date
what is money supply?
total amount of money in economy at a particular time
what is narrow money?
refers to money supply made of cash and liquid bank deposits
what is broad money?
measure of total amount of money held by households and companies in the economy
what is liquidity?
measures the ease with which an asset can be converted into cash without loss of value
factors affecting the money supply
-open market operations: refers to central bank buying and selling bonds- buying bonds increases money supply
-reserve requirement: percentage of deposits made by customers at bank that bank must keep
-discount rate: rate at which central banks charge commercial banks for borrowing money
factors affecting money demand
(when interest rate goes up, demand for money goes down- contraction along demand curve)
-rate of interest on loans
-number/value of monetary transactions that expect to carry out
-extent to which hold other financial assets
-changes in gdp
-extent to which possible to use debit/credit cards
-rate of anticipated inflation
what are money markets?
-where short-term debt is bought and sold.
provide means for lenders and borrowers to satisfy short-term financial needs
-covers several markets e.g. markets for treasury bills,commercial bills and inter-bank lending
what is inter-bank lending?
banks lend to each other for short period to balance their books
what are bills?
short-dated financial assets maturing within a year
what are capital markets?
financial market in which long-term debt or equity-backed securities are bought and sold
market capitalism?
total market value of issued share of a company
what is a primary market?
where newly issued securities are sold by companies, usually arranged by investment banks
what is a secondary market?
allows shares to be converted quickly into cash, increasing the liquidity of securities
what is foreign exchange market?
where buy and sell foreign currencies
what are foreign exchange markets made up of
-spot transactions: involve immediate exchange of foreign currency
-forward markets: exchange of foreign currencies at some specified time in the future
what are financial markets?
-any exchange that facilitates trading of financial instruments
what do financial markets enable firms to do?
raise money for investment via both debt and equity measures which can offer a balance between different financial instruments
role of financial markets:
-facilitate saving by businesses and households
-lend to businesses and individuals
-facilitate the exchange of goods and services
-provide forward markets in currencies and commodities
-provide a market for equities
difference between debt and equity
equity- wealth
debt- money people owe
when does negative equity occur
-what you owe exceeds the value of what you own
when does positive equity occur
-value of the house is higher than the value of mortgage
debt finance:
borrowing money from an outside source with the promise of paying back the borrowed amount plus agreed-upon interest
advantages of debt finance:
-less capital required to be invested by shareholders
-debt can be relatively cheap source of finance compared with dividends
-easy to pay interest if profits and cash flows are strong
-debt does not change stakeholder control
-interest on debt is tax deductible
disadvantages of debt finance:
-businesses may be vulnerable to unexpected changes in interest rates
-businesses have less control of events if they are highly geared- e.g. have high ratio of debt to equity
what is equity finance:
raising capital by selling shares of a business to investors
advantages of equity finance:
-equity does not have to be repaid
-equity is risk capital and does not offer a fixed return
-gives business more flexibility
disadvantages of equity finance:
-dilution of ownership for the original founders
-equity requires a higher return than debt because it is risk capital
-growing expectations over time that dividends will be paid
bond/gilts meaning
fixed-interest securities sold by gov or companies when they borrow in the long-term
maturity meaning:
date which the borrower will repay the lender
face value/maturity price
amount paid to bondholder at maturity date
coupon meaning:
guaranteed fixed annual interest payment
coupon rate:
yield x bond market price
yield:
return to the investor from the bonds coupon payments
-dividing annual coupon payment with current market price
coupon is fixed but bond will vary- when bond prices are falling, yield will rise
calculate bond market price
coupon/ yield
