financial market and monetary policy

what are securities

shares or bonds issued by companies or governments

what is debt

financial liabilities - money owed

what is equity

the ownership of all or part of a business or financial asset

what are the 3 different types of financial markets

• Money markets

• Capital markets

• Foreign exchange (forex) markets

what are money markets and give 2 examples and what the purpose of them is

Markets for short-term finance (less than 1 year) used for liquidity and managing cash flow.

e.g:

• Treasury bills

• Interbank loans

helps firms and banks manage day-to-day cash flow

what are capital markets and what are their purpose

Markets for long-term finance (more than 1 year) used for investment and growth.

fund long-term investment e.g expansion or new projects

what are the 2 types of capital markets and state the difference

primary market - where new long-term securities are issued e.g new shares or new bonds

secondary market - where existing long-term securities are traded e.g buying or selling already issued shares or bonds

what are foreign exchange (forex) markets and what is their purpose

buying and selling currencies

enable international trade and investment

what re the 2 types of foreign exchange and what is the difference

spot exchange - exchange rate right now , immediate transactions

forward exchange - exchange rate agreed now for a future transaction

why do forward exchange rates exist

to reduce exchange rate risk - so firms are not affected by future fluctuations in currency values.

Which financial market is lowest risk? Why

Money markets → short-term lending = lower uncertainty and risk

because:

• Fewer changes can occur in the economy over a short period

• Interest rates, inflation, and business conditions are less likely to change drastically

Why do firms use capital markets instead of money markets?

Because capital markets provide long-term funding needed for investment and expansion

Which financial market is most volatile?

Foreign exchange markets → exchange rates constantly fluctuate

what are debt securities

Financial assets representing a loan to a firm/government

what are equity securities

Financial assets representing ownership in a firm

key comparison of debt and equity securities

• Debt: you lend money → you get paid back no matter what (unless they go bankrupt)

• Equity: you own part → you only get paid if the business makes money

Why is equity riskier than debt?

Because shareholders are last to be paid in liquidation and dividends are not guaranteed, as they depend on profits

what is narrow money

the part of the money supply that is made up of cash and other liquid bank and building society deposits

what is broad money

the part of the money supply that is made up of narrow money and less liquid assets

what is the money supply

the total value of all money in an economy

what is liquidity

the ease with which an asset can be converted into cash without significant loss of value

what are the 4 functions / characteristics of money

• a medium of exchange - it can be exchanged for something else. ( you can buy with it)

• a store of value or wealth - you can save with it

• a measure of value / unit of account - can be used to compare value/worth

• a standard for deferred payment - allow credit ( buy now, pay later )

what are the 6 characteristics of money

• durable

• portable

• divisible

• universally acceptable

• scarce

• secure

what is liquidity

How easily an asset can be turned into cash quickly without losing value

What makes an asset liquid?

It can be:

• sold quickly

• with little/no loss in value

Give 2 examples of highly liquid assets

• Cash

• sight deposits

Give 2 examples of low liquidity assets

• property

• pensions