The Financial Sector

Question 1

What is the first role of the financial market?

Answer 1

To facilitate saving e.g. bank account or pension fund

Question 2

What is the second role of the financial market?

Answer 2

To facilitate lending, banks might lend to personal loans or mortgages

Question 3

What is the third role of the financial market?

Answer 3

To facilitate exchange e.g. provide opportunities for firms and individuals to exchange, making trade easier

Question 4

What is a mortgage?

Answer 4

A loan from the banks to pay for a house. Normally consumers need to take out a deposit of at least 5% of the value of the house then pay back to mortgage with interest

Question 5

What is the fourth role of the financial market?

Answer 5

To provide a market for equity. E.g. large international banks help companies sell their shares by finding investors to buy them

Question 6

Define forward contracts

Answer 6

Special contracts that guarantee that a trade will happen at a fixed future date at a fixed price

• useful for selling commodities and currencies as both have volatile prices

Question 7

What is a commodity?

Answer 7

Raw materials used in the production of goods that are interchangeable with other goods of the same type

• have price instability

Question 8

What is the fifth and final role of the financial market?

Answer 8

To provide forward markets

• market in which forward contracts can be drawn up and put in place

Question 9

What is meant by equity?

Answer 9

When firms raise finance by selling shares