Financial Markets Flashcards
(42 cards)
What are the 4 functions of money
Medium of exchange
Standard of deferred payment
Store of value
Unit of account (Compare value)
What is liquidity
How quickly and certainly money can become cash
From highest to lowest, place assets in order of liquidity
Cash
Sight Deposit (withdrawal limit at bank)
Treasury bill
Gold bar
2yr Corporate Bond
Gilt (10 year gov, bond)
Advances (loans)
Why do commercial banks need to keep a certain reserve ratio
To ensure they are liquid enough to meet customers cash needs
Who is the central bank in America
Federal reserve
Who is the main regulator of financial institutions
The FCA/PRA
Give 3 ways in which financial institutions facilitate economic growth and development
Providing liquidity for investors (loans)
Allowing businesses to function (payment systems)
Allowing smooth consumption for households (credit cards)
Facilitating mergers and aquisitions
Give 4 macro impacts of financial institutions
Positive contribution to GDP
Employment (following trumps DEI department redundancies Goldman Sachs have removed their inclusive hiring policy)
Government revenue
Support supply side developments through loans
What are bonds
A security sold by the government to borrow and finance debt
Describe the relationship between the price of bonds and interest rates
The price of bonds is inversely related to interest rates
Why does increased demand for bonds mean a lower bond yield
As they trust trust they will get paid
Why does the UK have relatively low bond yields
We are secure
Poor returns in the private sector
State 5 reasons why long term bond yields in the UK are rising
Inflation concerns (Casued by lack of BOE responsiveness during cost of living crisis)
Monetary policy expectations (yet starting to go down so may ease)
Increased government borrowing ( Projected at £140 billion for the fiscal year 2025/26)
Global market trends (Trump tariff uncertainty/war in middle east)
Weaker economic growth outlook (ONS downgraded growth in spring budget)
Why do inflation concerns cause long-term bond yields in the UK to rise
Rising inflation makes future bond payments worth less, so investors want higher returns to make up for it.
Concerns may still be prevalent due to the BOE’s lack of timely responsiveness during cost of living crisis
How do Monetary policy expectations mean long term bond yields in the UK are rising
Speculation around persistence of high interest rates raises the cost of borrowing and causes bond yields to rise (but BOE planning to cut I/R if inflation continues to fall)
How does government borrowing mean long term bond yields in the UK are rising
Larger debt issuance increasing supply in the bond market, pushing prices down and yields up
How do global market trends mean long term bond yields in the UK are rising
As major central banks maintain high interest rates, UK yields rise in tandem due too interconnected financial markets
Also uncertainty due to Trump tarrifs and war can affect yield as more uncertain global market
How does a Weaker economic growth outlook mean long term bond yields in the UK are rising
Investors require higher yields as compensation for perceived economic risks
What are 7 key functions of commercial banks
Accepting deposits
Providing loans
Credit creation
Facilitating payments
Investment services
Foreign exchange services
Safekeeping of valuables (safety deposit boxes)
What are the two ways in which commercial banks accept deposit
Creation of
Current accounts
Savings accounts
What do banks use their primary source of funds (deposits) for
To offer loans
State 3 types of advances
Personal loans
Business loans
Mortgages
How do commercial banks create credit
Through lending activities by maintaining capital ratio
State 4 ways in which commercial banks facilitate payments
Cheques
International transfers
Debit-Credit cards
Online banking
