Chapter 1

Question 1

What must money have to be acceptable as a medium of exchange?

Answer 1

Sufficient in quantity
Generally accepted by all parties
Divisible into small units
Portable

Question 2

What is the role of the Bank of England

Answer 2

Issuer of banknotes 
Banker to government 
Banker to banks
Adviser to govern
Manage gold and Fx reserves 
Lender of last resort

Question 3

Why do institutions trade ok financial markets?

Answer 3

To reduce risk

Question 4

What is the equity market

Answer 4

Companies raise money over the long term to finance long term investment in property equipment and product development

Question 5

What are the money markets

Answer 5

They offer short term borrowing- interbank markets, treasury bills and commercial paper. They provide liquidity to institutions

Question 6

What are capital markets?

Answer 6

Long term lending and borrowing- bond and equity markets which provides businesses and governments with long term funding for investment and projects

Question 7

Why does it cost more for retail borrowers then wholesale?

Answer 7

There is an economy of scale. When lending large amounts the admin costs are lower in proportion to the amount of money involved. This reduces the the spread between lending and borrowing.

Question 8

What is the difference between secured and unsecured loans.

Answer 8

Secured is backed with an asset of value. Unsecured is based on trust. Secured transactions in repo market, unsecured in interbank market. The risk of default is lower on secured so the rates are lower.

Question 9

What is the primary and secondary market?

Answer 9

Primary raises new capital. For example issuing of new shares.

Secondary where existing securities are traded. The secondary market reduces risk in the primary market by offering a market where people can buy and sell shares.

Question 10

What is the purpose thebfx market?

Answer 10

It allows companies to exchange currency for another when dealing with international customers and suppliers.

Question 11

What is the repo market?

Answer 11

Is a sale and repurchase agreement usually based on gilts.

Question 12

Who are the main participants in the gilt repo market

Answer 12

U.K. & Foreign banks
Building societies
Mutual funds
Hedge funds
 overseas central banks

Question 13

What is the interbank market?

Answer 13

It’s an unsecured market in which banks and other large financial institutions borrow and lend large wholesale sums for short period from overnight to 6 months

Question 14

Why are treasury bills low risk?

Answer 14

Because the government are the borrower.

Question 15

How is repo interest rate represented?

Answer 15

The interest rate is reflected in the difference between the sale and repurchase price.

Question 16

What is the commercial paper emarket?

Answer 16

It brings together large companies that need short term unsecured borrowing and investors who want to offer short term loans.

The term is used for securities issued by companies for up to one year.

1-5 years are medium term notes

5 years plus are bonds

Question 17

What are corporate bonds?

Answer 17

They are issued by companies that want to finance projects between 5-30 years. They must have good credit rating.

New issues are bought in the primary market. Once in existence they are traded on the secondary market.

Question 18

Why are bonds?

Answer 18

They are Gilts or similar instruments with terms of over 5 years.

They are issued by governments, companies and local authorities.

Question 19

What is an ipo?

Answer 19

It’s the first sale of shares to the public in a initial public offering.

Question 20

What are the 3 main ways companies can issue new shares?

Answer 20

Prospectus issue
Private placement
Rights issue

Question 21

What is the reinsurance market?

Answer 21

It’s a market where insurance companies package up risks they have accepted and sell bits to other insurers to balance the risk. It divides the risk up between insurers so a larger than usual claim is not just felt by the issuing insurer and the claim is split between all the insurers who bought parts of the risk.

Question 22

Who are government gilts issued by?

Answer 22

The debt management office