Financial markets Flashcards
What is the role of financial markets?
Saving
Help businesses with investments
Help the exchange of goods and services
What is a money market?
Liquid markets
Trading assets that only last a year
What is a financial market?
Where buyers and sellers meet to trade assets
What is a currency market?
Buying and selling currency
What is debt capital?
Assets in which interest is made
Borrowing for the issuer
What is equity capital?
Paying back profits (shares)
Why do we need forward markets?
Buy currency while it is weak
Speculate it will increase in the future
Sell it and make money
Why is the demand curve for currency downwards sloping?
At lower interest rates consumers hold more money
At higher interest rates consumers save more money as the rate of return on savings is higher
How can central banks lower interest rates?
Lower reserve requirement
Increase the money supply
Lower interest rates
How can the central bank help businesses?
They can borrow money
Increase their liquidity
What is a bond?
A piece of paper
You pay for it
You are guaranteed the face value of the bond back
It is used to generate revenue for firms
What does it mean if a bond matures?
The time when the government have to pay the money back at nominal value
What is fractional reserve banking?
Saver saves £100 in the bank
They need to keep some of it still in the bank as a reserve £10
Borrower borrows £90
They are charged interest on this
Money that is extra is the profit that banks make
What is a bank run?
Liquidity crisis
They do not have enough money liquid assets in the short run to meet short term liabilities
What is insolvency?
Not enough capital to offset a fall in asset values
For example if loans get written off
They need to cover the losses with assets
If they cant cover this the bank will be in debt
