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Financial Markets And Institutions > Topic 1 > Flashcards

Topic 1 Flashcards

1
Q

What are the five parts of the financial system?

A

Money
Financial instruments (loans, bonds etc.)
Financial markets (where people trade)
Financial institutions (commercial banks etc.)
Central banks

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2
Q

What are the 5 core principles of the financial system?

A 
Time has value
Risk requires compensation
Information is the basis for decisions
Markets determine prices and allocate resources
Stability improves welfare
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3
Q

Why does time have value?

A

Because money being lent has an opportunity cost and this must be compensated for

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4
Q

What is the use of money in the financial system? (2)

A

Pay for purchases

Store wealth

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5
Q

What is the use of financial instruments in the financial system? (2)

A

Transfer resources from savers to investors

Transfer risk to those best equipped to bear it

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6
Q

What is the use of financial markets in the financial system?

A

Allows us to buy and sell financial instruments quickly and cheaply

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7
Q

What is the use of financial institutions in the financial system?

A

Provides many services, including access to financial markets and information about borrowers

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8
Q

Role of central banks?

A

Monitor and stabilise economy

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9
Q

What is indirect finance?

A

Finance where there is an institution such as a bank between the lender and borrower

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10
Q

What is an asset?

A

Something with economic value

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11
Q

What is a liability?

A

An entities financial debt or obligation (such as a loan)

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12
Q

What is a financial intermediary?

A

Institution such as a bank that holds funds from lenders to make loans to borrowers

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13
Q

Difference between direct and indirect finance?

A

Direct finance has no middle man - for example people trading on the financial markets

Indirect finance will have a financial intermediary between lender and borrower such as a bank

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14
Q

What is a security (/financial instrument/financial asset)?

A

A financial instrument is the written legal obligation of one party to transfer something of value, usually money, to another party at some future date, under certain conditions.

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15
Q

Who has surplus and deficit units?

A

Creditors - surplus

Borrowers - deficit

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16
Q

Why is the channeling of funds so important?

A

In order to produce efficient allocation of capital tf higher production in economy

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17
Q

2 more benefits of FMs?

A

Improve wellbeing of consumers - loans help students, also help families obtain mortgages etc

Lenders can earn return on their investment

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18
Q

What is liquidity?

A

The ease of buying and selling assets (high liquidity means it will be easy and fast to sell/buy)

19
Q

What is an ultimate lender?

A

Someone with an excess of income over expenditure, a creator of net financial surplus

20
Q

What is an ultimate borrower?

A

Someone with an excess of expenditure over income, a creator of net financial deficit

21
Q

4 aims of borrowers?

A

Long loan (low liquidity)
Minimise cost
Minimise risk
Minimise transaction costs

22
Q

4 aims of lenders?

A

High Liquidity
Maximum return
Minimum risk
Minimum transaction costs

23
Q

What are the three functions of money?

A

Means of payment
Unit of account
Store of value

24
Q

What does it mean that ‘money is a unit of account?’

A

We measure value with money, therefore it is a unit of account

25
Q

What is market liquidity?

A

The ability to sell assets for money

26
Q

What is funding liquidity?

A

The ability to borrow money to buy securities or make loans

27
Q

What is the monetary base?

A

Currency (bank notes and coins plus reserves)

28
Q

What is M1?

A

Narrow money - currency plus demand deposits

29
Q

What is M2?

A

Intermediate money - M1 plus short term time deposits

30
Q

What is M3?

A

Broad money - M2 plus long term time deposits

31
Q

Explain the CPI?

A

It measures the rise in price of a typical basket of goods, relative to a base year

32
Q

CPI equation?

A

CPI = {(cost current year)/(cost base year)} x100

33
Q

CPI equation to find inflation?

A

Inflation(2015) = {CPI(15)-CPI(14) divided by CPI(14)} x100

34
Q

3 roles of financial assets?

A

Act as a means of payment
Act as a store of value
Allow for transfer of risk

35
Q

5 financial instruments used to store value?

A 
Bank loans
Bonds
Home mortgages
Stocks
Asset-backed securities
36
Q

3 financial instruments used to transfer risk?

A

Insurance contracts
Futures contracts
Options

37
Q

3 economic functions of financial markets?

A

Price discovery process
Provide liquidity
Reduce cost of transacting (search and information costs)

38
Q

What is a futures contract?

A

A contract to transfer a fixed quantity of commodity/asset at a fixed price on a future set date (transfers risk)

39
Q

What are options?

A

Dedicate instruments whose prices are based on the values of some underlying asset. They give the holder the right to buy/sell a fixed quantity of the underlying asset at a predetermined price on a specified date.

40
Q

Classification of financial market via nature of claims? (2)

A

Debt market - creditors can redeem securities at maturity date (eg. Debt securities)

Equity market - represent equity or ownership of a firm (eg. Stocks)

41
Q

Classification of financial market via maturity of claims? (2)

A

Money market - for financial instruments a year or less to maturity

Capital market - for securities longer than a year

42
Q

Classification of financial market via seasoning of claims? (2)

A

Primary market - for new/first issue market

Secondary market - for sales of previously marketed instruments

43
Q

Classification of financial market via delivery time? (2)

A

Spot market - financial asset delivered immediately

Derivative market - financial asset delivered in future (same as futures or forward market)

44
Q

Classification of financial market via organisational structure? (3)

A

Auction market - brokers act for clients in organised exchanges

Over-the-counter market - trades are made through dealers who buy and sell their own inventory

Intermediate/dealer market - financial institutions sell their own securities issues to customers and invest the proceeds

Financial Markets And Institutions (8 decks)

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