Unit 12 - Financial Markets And Monetary Policy Flashcards
Assets
Things which people or organisations own
Liabilities
Things which people or organisations owe
Money
Primarily a medium of exchange or means of payments but also a store of value
Money supply
The stock of financial assets which function as money
Narrow money
Part of the stock of money, or money supply, made up of cash and liquid bank and building society deposits
Broad money
The part of the stock of money (or money supply) made up of cash, other liquid assets such as banks and building society deposits, but also some liquid assets. The measure of broad money used by the Bank of England is called M4
Liquidity
Measures the ease with which an asset can be converted into cash without loss of value. Cash is the most liquid of all assets
Shares
Undated financial assets, sold initially by a company to raise financial capital. Shares sold by public companies or PLC’s are marketable on a stock exchange, but shares sold by private company’s are not marketable. Unlike a loan a share signifies that the holder owns part of the enterprise
Bonds
Financial securities sold by companies (corporate bonds) or by governments (government bonds) which are a form of long term borrowing. Bonds usually have a maturity date on which they are redeemed, with the borrower usually making a fixed interest payment each year until the bond matures
Equity
The assets which people own
Debt
People’s financial liabilities or money they owe
Financial markets
Markets in which financial assets or securities are traded
Money markets
Provide a means for lenders and borrowers to satisfy their short term financial needs. Assets that are bought and sold on money markets are short term, with maturities ranging from a day to a year, and are normally easily convertible into cash. The term money market is an umbrella that covers several markets, including the markets for treasury bills and commercial bills.
Capital markets
Where securities such as shares and bonds are issued to raise medium to long term financing and where shares and bonds are then traded on the second hand part of the market, e.g. the London stock exchange
Foreign exchange markets
Global decentralised markets for the trading of currencies. The main participants in this markets are large international commercial banks. Collectively foreign exchange markets are the largest markets in the global economy
Corporate bonds
Debt security issued by a company and sold as new issues to people who lend long term to the company. They can usually be resold second hand on a stock exchange
Government bonds
Debt security in the uk known as gilt edged securities or gilts issued by a government and sold as new issues to people who lend long term to the government. They can be resold second hand on a stock exchange
Coupon
The guaranteed fixed annual interest payment often divided into two 6 month payments. Paid by the issuer of a bond to the owner of the bond
Maturity date
The date on which the issuer of a dated security, such as a gilt edged security (long dated) or a treasury bill (short dated) , pays the face value of the security to the security’s owner
Commercial bank
A financial institution which aims to make profits by selling banking services to its customers
Systematic risk
In a financial context, this refers to the risk of a breakdown of the entire financial system, caused by inter linkages within the financial system rather than simply the failure of an individual bank or financial institution within the system
Credit
When a bank makes a loan it creates credit. The loan results in the creation of an advance which is an asset on the banks balance sheet and a deposit which is a liability of the bank
Profitability
The state or condition of yielding a financial profit or gain
Security
Secured loans such as mortgage loans secured against the value of property l, are less risky for banks than unsecured loans
Central bank
A national bank that provides financial and banking services for its country’s government and banking system as well as implementing the governments monetary policy and issuing currency. The Bank of England is the uks central bank
Monetary policy committee
The part of the Bank of England which implements uk monetary policy. The uk government sets the monetary policy objectives or targets, currently a 2% CPI inflation rate target, with the MOC then implementing monetary policy to try to hit the targets
Monetary policy instruments
Tools such as bank rate which are used to try to achieve monetary policy objectives
Bank rate
The rate of interest that the Bank of England pays to commercial banks on their deposits held at the Bank of England
Contractionary monetary policy
Uses higher interest rates to decrease aggregate demand and to shift the AD curve to the left
Exchange rate
The external price of a currency, usually measured against another currency
Expansionary monetary policy
Uses lower interest rate to increase aggregate demand and shift the AD curve to the right
Quantitative easing
When the Bank of England buys assets, usually government bonds, with money that the bank has created electronically
Moral hazard
The tendency of individuals and firms, once protected against some contingency to behave so as to make that contingency more likely
Liquidity ratio
The ratio of a banks cash and other liquid assets to its deposits
Capital ratio
The amount of capital on a banks balance sheets as a proportion of its loans
