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Economics A level Edexcel A > Financial markets > Flashcards

Financial markets Flashcards

financial markets

1
Q

what are financial marketss

A

places where buyers and sellers can trade financial assets
- brings together lenders and borrowers

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2
Q

what are lenders

A

those who have excess cash - eg savers and investors

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3
Q

what are borrowers

A

ppl who need cash right now but dont currently have it - eg individuals, firms, govts

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4
Q

points how the financial market works

A
  • lenders can go directly to bond markets or stock markets, eg can go to debt management and buy govt bonds, lending to the govt
    • they can go directly to companies and buy shares(equity capital)
  • they can go to an intermediary,
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5
Q

objectives of commercial banks

A
  • takes funds from lenders, a return is then paid on this money. from these savings, loans can be made, and lent out to individuals or firms who need to borrow and an interest rate is charged#
  • the interest rate to the borrowers is higher than the return to the lenders, so the commercial bank can make profit
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6
Q

what is the primary objective of all intermediaries

A

to make profit

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7
Q

pension funds

A
  • take huge sums of money from individuals looking to save for retirement
  • theyll invest it normally in stock markets
  • then theyll pay an annuity to pensioners when they reach pension age
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8
Q

what are the types of intermediaries

A
  • commercial banks
  • investment banks
  • pension funds
  • hedge funds
  • mutual funds
  • stock exchanges
  • insurance companies
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8
Q

hedge funds/mutual funds

A

institutions that take huge sums of money from lenders and will buy huge amounts of debt from it (debt issued by borrowers)
- theyll collect interest rates as the payments on all their debt theyre buying
- then will give a rate of return to lenders

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9
Q

difference between hedge funds and mutual funds

A

hedge funds engage in riskier transactions, eg hedge funds will buy up debt in leverage deals, which if they went wrong, large sums of money could be lost

  • mutual funds are less regulated than hedge funds
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10
Q

similarities between hedge and mutual funds

A

both take huge amounts of money from investors, buy a lot of debt, get an interest rate and a rate of return

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11
Q

types of financial markets

A
  • capital markets
  • money markets
  • currency markets
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12
Q

features of money markets

A
  • the buying and selling of financial assets here, are ones that have a maturity or payment date of a year or less - eg govt bonds or corporate bonds, any interbank lending
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13
Q

features of capital markets

A
  • buying and selling of assets that have a payback date of greater than a year, not as liquid as money market assets
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14
Q

What is the difference between debt, capital and equity capital?

A

Debt capital is any financial asset that pays back in interest rate - eg bonds
Equity capital is where the return is a dividend - eg shares

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15
Q

what is a dividend

A

a share of the profit

16
Q

what is a primary market

A

a primary market is where brand new bonds will be issued, eg through an investment bank

17
Q

what is a secondary capital market

A

where new bonds and shares can then be bought and sold again - eg through investment banks or stock exchange

18
Q

what is a spot currency market

A
  • where you can buy currency at the current exchange rate and get it delivered to you right now
19
Q

what are futures markets

A
  • where you can buy currency at the given exchange rate, but that currency is delivered to you some time in the future
20
Q

why would ppl engage in futures market transactions

A
  • eg if ur an importer, and worried about a weak exchange rate in a few months time(WIDEC), importing raw materials when exchange rate is weak causes higher costs
  • you could buy your currency now at current exchange rate, get it delivered to u in a few months time when the currency gets weaker, and you’re not affected by it
  • gambling, making money from exchange rate changes, if u think the ER will get stronger, but ur currency now, let it get delivered to you in 6 months, if current exchange rate has increased, sell it and make profit
  • ultimately, it encourages speculation
21
Q

what are the four functions of money

A
  • a medium of exchange
  • a store of value
  • measure of value
  • method of deferred payment
22
Q

characteristics money needs to have

A
  • has to be acceptable
  • has to be portable
  • durable
  • divisible
  • limited in supply so it keeps it’s worth
    difficult to forge
23
Q

what is commodity money

A

money which has intrinsic value - eg gold

24
Q

what is fiat money

A

money with no intrinsic value, eg if the money loses value, u cant trade it for something else

25
Q

types of money

A
  • notes and coins
  • deposits - high liquidity
  • near money - non cash assets which can be easily converted into money, eg bonds, with maturity dates of years, can convert into cash easily
26
Q

what is liquidity

A

the ease at which money can be converted into cash

27
Q

what is the money supply

A

the total amount of money circulating in the economy

28
Q

what is M0

A

a measure of the money supply which includes the total amount of notes and coins in the economy, and all the deposits that individuals have in bank accounts, eg savings

29
Q

what happens as we go from m0 to m4

A

we add more non cash financial assets into our measure of the money supply
- NCFA are liquid, but not as liquid as notes and coins

30
Q

what are the roles of financial markets

A
  • to facilitate saving by businesses and households, offering a secure place to store money and earn interest
  • to lend to businesses and individual, financial markets provide an intermediary between savers and borrowers
  • to allocate funds to productive users, FMs allocate capital to where the risk adjusted rate of return is highest
  • to facilitate the final exchange of goods and services, such as contactless payments systems, foreign exchange systems etc
  • to provide forward markets in currencies and commodities, forward markets allow agents to insure against price volatility
31
Q

what is the quantity theory of money

A

the theory that links growth rate in the money supply to growth rates in prices eg inflation

Economics A level Edexcel A (22 decks)

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