The Value of the Financial System

Question 1

What is a bond?

Answer 1

legally binding documents that state one party will conduct regular payments to the bond owner.
Issued by governments, municipalities and public organisations to gain public funding.

Question 2

Impact of bonds on the economy

Answer 2

• Main source of financing for the government
• Main instrument used by the Bank of England to control the quantity of money in the economy
• Used by companies to raise funds

Question 3

What are money markets?

Answer 3

A wholesale market only available to large corporation where large amounts of funds can be borrowed for a short period of time.
Loans are handled by agreeing a discount rate.

Question 4

Impact of money markets on the economy

Answer 4

Helps large companies (especially banks) manage liquidity

Question 5

What is the interbank market?

Answer 5

Allows banks to transfer money overnight to balance their books.
LIBOR- the rate at which banks lend to each other

Question 6

What is the Forex/FX?

Answer 6

Foreign exchange market where one currency is exchanged for another.

Question 7

What is the role of the financial system?

Answer 7

Facilitate the flow of funds from surplus to deficit units by transforming liquid funds to the production factor capital (e.g. machines, computers, tools)

Question 8

What is the difference between direct and indirect finance?

Answer 8

Direct= surplus units can use financial markets (e.g. bond/share) to directly invest in a business
Indirect= makes use of intermediaries experience

Question 9

Who are the main participants in the financial environment?

Answer 9

• Government= raise taxes, provide regulation, borrow through bonds
• Central bank= issues money, sets interest rates, fights inflation, monitor liquidity of banks
• Households= take out loans and deposit savings
• Financial institutions= mediate between borrowers and lenders
• Businesses= borrow/save, issue shares and bonds