Financial markets - economics unit 4

Debt

borrowing money to be repaid with interest

equity

owning shares of a company

coupon

annual interest as a percentage of the bond's face value

yield

annual interest as a percentage of the bond's market value

maturity

the date a loan must be re paid

money supply

liquidity and spectrum of liquidity

functions of money

- unit of account (measure value)
- standard of deferred payment
- store of value
- medium of exchange

characteristics of money

acceptable
difficult to forge
durability
divisibility
limited supply
portability

most liquid

cash

least liquid

property

liquid

how easily assets can be turned into cash

role of financial markets

- insure against risk
- facilitate transactions
- channel funds between savers and borrowers

financial intermediaries

banks and pension funds

financial markets

bond markets and equity markets

different types of financial markets

- foreign exchange markets, spot (immediate) and forward (future)
- capital market (medium long finance)
- money market (short term finance)

narrow money

notes, coins, balances available for normal financial transactions

broad money

includes money held in bank accounts which is not immediately accessible

asset

something we own which has value

liability

something we owe

assets examples

- cash
- money at call
- treasury bill
- investments
- advances
- fixed assets

liabilities

- share capital
- reserves
- long term and short term debt
- deposits

objectives of commercial banks

- profit
- liquidity
- security

profit and security

trade off - secured loans are less profitable than unsecured loans

liquid and profit

trade off - more liquid less profit

commercial banks

- facilitate cash withdrawals and card payments
- lend money
- accept deposits

investment banks

- investment management (for others)
- proprietary trading (for self)
- advice on share issues
- advice on mergers and acquisitions

how banks create credit

- selling mortgages
- giving loans
- business investment relies on bank loans

banks have a limit on how much credit they can create:

- reserve ratio
- liquidity ratio (cash)
- capital ratio (limits on shares they can buy)