Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
76 Cards in this Set
- Front
- Back
|
Money |
Medium of exchange - something that is acceptable as payment for goods and services or to settle a debt |
|
|
Four functions of money |
Medium of exchange Store of value Unit of account Standard of deferred payment |
|
|
Barter |
Exchange of goods and services between parties to a transaction without the use of money |
|
|
application of barter |
in 2015, Greece turned into a growing barter economy after the government shut down the banks due to a fear of a bank run. they reopened it but set strict controls on withdrawals. this left many businesses struggling for cash. |
|
|
Double coincidence of wants |
Exists when two parties to a transaction have products of approximately equal value and both want what the other possesses Results in fewer transactions occurring in an economy |
|
|
unit of account
|
provides a common measure of value of goods and services, allowing parties to transactions to assess the value of the G&S available to them
|
|
|
store of value |
it needs to be able to maintain its value over time |
|
|
liquidity |
measures the ease of which assets can be turned into cash |
|
|
hyperinflation |
rate of increase at which the authorities have lost control of prices |
|
|
characteristics of money |
-durable (shouldn't degrade over a long period of time) -divisibility (needs to be divided into small units of amount) -transportability (needs to be small and light so it can be taken to many locations) -non-counterfeitability (can't be easy to copy because then it will make it less scarce and so lose its value) |
|
|
money supply |
total stock of money circulating within an economy |
|
|
financial market |
place where buyers and sellers meet to trade financial assets |
|
|
Money market |
Market that’s made up of financial institutions and other organisations that want to borrow or lend money on a short-term basis (under a year) |
|
|
Capital market |
Markets where financial securities such as shares and bonds are issued to raise medium to long term finance (over a year) |
|
|
Financial securities |
Financial assets such as shares and bonds that can be bought and sold on markets |
|
|
Lenders |
Economic agents that have large excess cash reserves that are willing to lend money to borrowers to receive a return (savers and investors) |
|
|
Borrowers |
Economic agents that need to borrow money to finance their transactions but don’t have money at the time (individuals, firms, governments) |
|
|
Intermediaries |
- Organisations that take funds from lenders and loan them to borrowers - They usually charge a higher interest rate to borrowers that the rate of return given to lenders, so they can make a profit |
|
|
Examples of intermediaries |
Commercial banks Investment banks Pension funds |
|
|
Examples of money market asset transactions |
Government bonds that have maturity date of under a year Interbank lending (usually daily transactions ) |
|
|
Two types of Transactions of capital markets |
Debt Capital - financial assets that are paid back in interest rates - form of borrowing (government bonds) Equity Capital - financial assets that are paid in dividends as they are buying shares of a company (shares) |
|
|
Types of capital market |
Primary - new issued market, where new bonds are issued (debt management office/ investment bank) Secondary - bonds (government and corporate) and shares can be sold on again to other people |
|
|
Foreign exchange market |
Market where traders buy and sell currencies |
|
|
Money market instruments |
Treasury bills Commercial paper Certificates of Deposit (CDs) Interbank Loans |
|
|
Treasury bills |
Short term gvt securities that are sold at discounts to investor that get their money at the original price) They are low risk because the chance of the Treasury defaulting is low risk |
|
|
Commercial paper |
Short term debt instrument issued by a company that are given out in the same way as Treasury bills More risky than treasury bills |
|
|
Certificates of Deposit |
When an organisation deposits money in a bank in return of a certificate. The money gains small interest because it is risk free. Interest can be fixed or variable Can also be done at the discount to face value |
|
|
Interbank Loans |
Banks loan money to other banks because they need |
|
|
Commercial Bank |
Financial institution whose main business is to take deposit and make loans, as well as other financial services like advice and insurance - Lloyds - Barclays - Natwest |
|
|
Functions of commercial banks |
- Act as financial intermediaries, bring buyers and sellers together - Lend money and accept savings - Allow payments from one agent to another - Give advice (insurance, financial etc.) |
|
|
Investment Bank |
A bank that specialises in complex financial activities, such as assisting governments and businesses to raise capital or advising businesses on mergers with other businesses - Goldman's Sax - JP Morgan - Nomura - Credit Suisse |
|
|
Merger |
Occurs when two or more firms join together to form a new larger business |
|
|
Systemic Risk |
When there’s a risk to the whole market,system or even economy, as opposed to a risk linked to one organisation |
|
|
Takeover |
The purchase of a controlling interest in one business by another |
|
|
4 types of loans |
Overdrafts - allows customers to overspend their current account up to an agreed limit (short term) Credit cards - popular type of short term loans with high interest rates Bank loans - loans granted to businesses and individuals (short/medium term) Mortgages - long term loans provided for the purpose of buying property |
|
|
Assets on balancing sheet |
- Cash - Reserves at Bank of England - Interbank Loans - Short term investment( money market - treasury bills) - Long term investment (capital markets) - Loans payed out (advances like mortgages) - Fixed assets (buildings, machinery etc.) |
|
|
Derivatives |
A range of complex financial securities that can be profitable but risky |
|
|
Liabilities in balance sheet |
- deposits
- short term borrowing (borrow from interbank of BoE) - money market - long term borrowing (issue corporate bonds or shares) - capital market - shareholder's profits (dividends) - retained profits |
|
|
narrow money |
narrow - includes all physical money like coins and currency along with deposits on demand and liquid assets held by the central bank |
|
|
broad money |
much more inclusive measure of the money supply, including notes and coins but also less liquid financial assets, such as savings accounts and institution's bank accounts |
|
|
Treasury |
Government's economic and finance ministry, maintaining control over public spending and overseeing the UK's economic policy |
|
|
Bonds |
financial securities issued by governments and companies with the aim of raising capital. It's repaid over the medium to long term |
|
|
Shares |
Equal units of ownership of a company offering financial benefits |
|
|
Coupon Rate |
interest rate attached to the returns of a bond |
|
|
Maturity |
Date at which a bond is due for repayment |
|
|
Yield |
refers to the interest or dividends received from a security
|
|
|
Debt [bonds] |
- amount of money borrowed by one person or organisation from another, usually with interest added - it allows business to retain full control, but they are committed to regular interest payments, and are vulnerable to rise in interest rates, meaning more costs in the long term |
|
|
Equity [shares] |
- value of that part of a business' capital that's generated through the sales of shares - they don't have to pay regular interest rates and they may not pay out dividends if the business makes enough profit. But if too much shares are sold, existing owners can lose control of the business. |
|
|
organisations that issue new financial assets in the primary market |
debt management office (UK) investment bank |
|
|
well known UK capital market |
London Stock Exchange (LSE) |
|
|
relationship between bond prices and market interest rates |
- the higher the MIR, the lower the bond price - this is because the coupon rate is fixed so the rate needs to be more attractive than the market interest rate, or else people wouldn't buy it |
|
|
different ways in which businesses can gain capital |
- sell shares of company - sell bonds - borrow from banks |
|
|
role of financial markets in the wider economy (overall) |
- financial markets bring those who want to invest surplus funds with those who want to borrow funds - Firms can borrow money to invest and raise funds, allowing them to increase productive capacity and efficiency - Governments can borrow funds to invest in the economy's infrastructure and provide merit goods that can lead to the development of the economy |
|
|
role of financial markets in the wider economy (money markets) |
- money markets allow governments and business access to funds to conduct their day-to-day operations - the central bank can allow control the money supply (BoE can buy treasury bills from commercial banks so that banks can boost their cash reserves and increase loans, increasing money supply. or they can sell treasury bills and reduce cash reserve, thus reducing loans and money supply) repo and reverse repo |
|
|
role of financial markets in the wider economy (capital markets) |
- provides an alternative to bank loans - the buying and selling of shares and boans have allowed business to overcome the decline of bank lending, especially after the financial crisis in 2008 - this is helped to stimulate investment and economic growth in the UK economy |
|
|
role of financial markets in the wider economy (forex markets) |
- these markets are essential to international trade - they are able to sell their own currency to purchase goods and services from other currencies - this increases imports of capital goods and exports - this leads to increased production, employment and trade |
|
|
roles of investment banks |
- prop trading (invest surplus cash into financial assets to profit) - market making (insurance a market can exist. bonds and shares can be bought and sold from investment banks) - advisory roles (mergers and acquisitions). provide advice on when they should do it, |
|
|
why is systemic risk bad
|
- if one commercial bank failed, there would be a loss of savings and investments held by the bank - this could lead to loss of confidence in banks, resulting in a bank run where people and firms rush to withdrawal their deposits. It affects other firms - other banks are affected because another bank may have had assets in the failed bank. If they don't have enough capital to offset their assets that were lost, they can become insolvent, leading to a knock-on effect where the whole banking system fails. |
|
|
balance sheet |
- financial statement recording the assets and liabilities of a business on a particular day at the end of an accounting period |
|
|
equation of balance sheet |
assets = liabilities + capital |
|
|
liquid coverage ratio (LCR) |
- requires banks to hold sufficient liquid assets to exceed the net outflows of cash of the next 30 days |
|
|
two ways in which a commercial bank can fail |
- insolvency - bank run both lead to systemic risk |
|
|
bank run |
- banks don't have enough short-term liquid assets to meet short-term liquid liabilities - this results it a liquidity crisis, where firms and individuals want their deposits now |
|
|
insolvency |
- not enough capital to offset losses in assets - liabilities > assets. the bank owes more than it owes |
|
|
tools to prevent systemic risk |
- cash ratio - liquid current ratio (LCR) - leverage ratio - capital ratio - reserve requirement |
|
|
cash ratio |
forcing commercial banks to hold enough cash assets |
|
|
liquid current ratio |
- hold enough liquid assets to meet its short term liquid liabilities (cash, reserve, interbank loan and capital market) |
|
|
leverage ratio |
- to make sure the commercial bank has enough capital to offset any long term investments and advances |
|
|
capital ratio |
keep enough capital to offset losses in advances
|
|
|
reserve requirements |
making sure a percentage of deposits put into banks are kept at the Bank of England |
|
|
objectives of commercial banks |
- profit maximisation |
|
|
why is profit maximisation an objective of commercial banks |
- most commercial banks are public limited companies (PLC), meaning they are owned by shareholder. Shareholders exist to make profits - profits can be made by borrow short term, which is low interest, and lending long-term, which is high interest. they can offer loans to more riskier people so they can charge higher interest |
|
|
liquidity vs profit
|
- liquid assets are less profitable than illiquid assets due to them being much lower risk
- banks need to hold enough liquid assets to prevent a liquidity crisis but not too much that it reduces their profit |
|
|
profit vs security |
- banks need to hold enough capital to prevent unexpected and expected losses in assets, in order to prevent insolvency - but in the long run, capital raised from the sale of shares and retained profits end up being more costly than debts, so shareholders would prefer to reduce the amount of capital they hold to increase profits |
|
|
consequence of bank failure |
- systemic risk - increased unemployment and lost output, leading to recession - shareholders lose their dividends |
|
|
difference between Treasury and Bank of England |
Bank of England - central bank responsible for the monetary policy Treasury - government's economic and finance ministry |
