The Financial System Flashcards
What is the Uk financial system and it’s two main roles?
Allows us to pay, borrow and insure against risk
Roles: Make financial investments, provide financial capital
What is Financial capital?
Funds to invest in physical capital, funds investment expenditure
What is physical capital?
Tools, Machinery, buildings used for production
Aggregate expenditure function
Y = C + I + G + (X-M)
C= consumption
I = Investment, asset
G = Gov expenditure
X-M = Exports - imports
Function for if income is saved, consumed or payed in taxes
I = S + (T-G) + (M-X)
S = private saving
(T-G) = Gov surplus budget
(M-X) = borrowing from rest of world
What are Shares and its other name?
Claim to dividens, they can help a company expand, shareholders become owners of company
- Equity inssurance
What are IPOs?
Initial public offering on the stock exchange, for first time
How to work out amount raised from IPOs
AR/Financial capital = Price of share x no.of shares issued
How are share prices determined?
By the stock market, goes on supply and demand
p-( price of expected + expected demand)/ 1+r
What is the bond market?
It is a promise/ IOU
- Usually from gov, like premium bonds
How to work out interest rate on a bond?
100 x Coupon/ Issuance Price
What is the secondary bond market?
After issuance, they can be sold here, like a stock exchange for bonds
How to work out resale price on a bond and what does the r stand for?
RP = (Principal + Coupon)/ 1+r
R = Current interest rate/ 100
What are Balence sheets?
Help to assess risk as they list all Assets, liabilities and networth
What is net worth?
measure of financial health
What is Insolvent and when does it happen
When a firm has failed and must cease trading
Happens when customers don’t repay loans, asset takes an unexpected hit
