Topic 1 - The role and structure of financial markets Flashcards
What are building societies
- A small bank where the lenders/owners are the members
- Offers a wide range of services, which are similar to a Bank
- Mutual Organisation
- Similar to Credit Unions
What services do Banks and Building Societies provide
- Make payments
- Keep funds safe
- Insurances
- Policies
- Loans
- Investments through savings
What is the difference between Proprietary and Mutual organisations
- Proprietary organisations are owned by their shareholders
- Mutual organisations owned and run for the benefit of the members
What methods are used in Money Transmission
- Provision of cash
- Cheque clearing
- Standing orders
- Current accounts
What are the 6 Clearing Banks in the UK
- HSBC
- Lloyds Banking Group
- NatWest
- Bank of London
- Barclays
- ClearBank
Pros and Cons of Equities (Shares)
Pros
- More profit than deposit based investments
- Income through dividends
Cons
- Risk of capital loss and dividends not paid
- Long-term
- Not as liquid as cash
2 types of property
- Commercial
- Residential
What 2 asset classes does commercial property fall between
- Equities and Bonds
- Less volatile than Equities!
Pros and Cons of Property
Pros
- Capital growth through rent and value
- Commercial has stable market
Cons
- Vulnerable to economic conditions E.G. no tenants
- Commercial is expensive to buy an run
- Not liquid
Main functions of Bank of England
- Banker to Banks
- Banker to Government
- Maintains financial stability of the economy
- Issues banknotes
- Adviser to Government
- In charge of Foreign Exchange
- Lender of last resort
Define Money and Capital markets
- Money markets - short-term borrowing and lending
- Capital Markets - long-term borrowing and lending
What are the 4 main asset classes
- Cash
- Property
- Fixed interest securities
- Shares
What is a Money Market Instrument (MMI) and give the 2 main examples
- Short-term, cash based loans
- Mainly used by businesses and the Government
- Commercial Paper and Treasury Bills
Pros and Cons of cash investments
Pros
- Small interest with no risk
- Short-term and liquid
Cons
- Not good for capital growth
- Inflation can devalue cash
Name the 5 main financial markets
- Interbank market
- Bond market
- Equity market
- Foreign Exchange market
- Insurance market
What are the main international markets
- New York - Dow-Jones and NASDAQ
- Tokyo - Nikkei
- Germany - DAX
- France - CAC40
- Hong Kong - Hang Seng
Define ‘Intermediation’
- The ‘middle man’ between surplus and deficit customers, E.G. Banks when someone b buys a house, they provide the mortgage
What are the benefits of Intermediation
- Diversification through spreading of risk
- Also makes services available to anyone from anywhere
What is Commercial Paper
- Short-term Bond
- Sold for discounted face value
- Used for short-term liquidity from corporations
Define running yield and redemption yield
- Running yield - annual return on investment
- Redemption yield - total return from all interest and also capital initially invested
Bonds
Define:
- Bond coupon
- Par value
- Redemption date
- The length of a typical bond
- Coupon providing fixed-interest, redemption date and where the bond comes from
- Face value - value paid for Bond (before interest)
- Date when Bond is repaid
- 5-30 years
What 2 key factors determine the price of second hand bonds
- Financial strength of issuer
- General interest rates
How are Gilts different to Bonds
- Gilts are Government Bonds issued by the DMO
- Bonds are from corporations
Pros and Cons of Bonds/Gilts
Pros
- Fixed income for fixed term
- Potential for profit when sold
Cons
- Small risk of no payment from interest and redemption of capital
- Vulnerable to general interest rates
Pros and Cons of Money Market Instruments (MMI)
Pros
- Safe, short-term investments
- Higher returns than savings
Cons
- Risk of companies defaulting
- Lower returns than other investments
