The Financial Sector

Question 1

What are the four functions of money?

Answer 1

1) To provide a medium of exchange (eliminates a double coincidence of wants)
2) Is a store of value
3) Is a means of deferred payment
4) Is a unit of account and helps determine the value of things relative to other goods

Question 2

In order for money to fulfil its four function what characteristics must it have?

Answer 2

1) divisibility to enable small transactions
2) durability
3) acceptability (trusted and accepted by everyone)
4) portability
5) stability in value
6) scarcity (limited to supply so it can act as a rationing tool)

Question 3

What are the assets that could fulfil the functions of money?

Answer 3

Bonds, shares, credit default swaps, options and futures

Question 4

What is a bond?

Answer 4

Usually issued by the government or large corporations, it is a tool used to raise revenue. The person purchasing the bond is promised to be paid back with interest. It is really valuable when it reaches maturity.
Insurance companies and pension funds buy these as they’re a form of a long term store of money.

Question 5

What is the interest paid on bond called?

Answer 5

Bond yield

Question 6

What is a share?

Answer 6

It can be bought from PLC’s. It is a percentage of a company you own. The amount of shares that are issued are called initial price ordered.
The profitability of the company determines the demand for shares. Funds are raised by selling more shares

Question 7

What is a dividend?

Answer 7

It is the share of profits

Question 8

What is a credit default swap?

Answer 8

When an insurance company purchases ‘bad debt’