finacial markets and monetary policy

What are financial markets

• They are markets that involve the trading of financial assets such as bonds stocks currencies etc.

• they allow firms and individuals to manage money, borrow invest and trade financial instruments

What are the characteristics of money

1. Durability - must last and not easily wear out

2. Portability - easy to carry and transfer

3. Divisibility - must be able to split into smaller units without losing value

4. Widely recognised - must be accepted and trusted

What are the functions of money?

• a medium of exchange

• A store of value

• A standard of deferred payment

• Unit of account

What is meant by medium of exchange

Money is used to buy and sell goods and services, replacing barter and removing the need for a double coincidence of wants

What is meant by unit of account

It provides a common measure of value, allowing prices to be compared

What is meant by store of value

Money can be saved and used in the future, although inflation can reduce its real value over time.

What is meant by standard of deferred payment

Money allows debts to be measured and repaid in the future

• e.g through loans and mortgages

What is meant by the money supply

Refers to the total amount of money available in an economy at a given time

What is meant by narrow money?

Narrow money includes

• physical cash (notes and coins) as well as bank reserves

(M0)

What is meant by broad money

Broad money includes narrow money AS WELL as bank deposits and savings

(M4)

What are the three types of financial markets

1. The money market

2. The capital market

3. The foriegn exchange market

What is meant by the money market

• Market for short-term borrowing and lending

• Used by banks, firms, and government

• Instruments include Treasury bills, commercial paper, interbank lending

What is meant by the capital market

• Market for long-term finance (over 1 year)

• Includes:

  • Stock market (equities)

  • Corporate and government bonds

• Used for investment in capital goods and long-term projects

What is meant by the foriegn exchange market

• Market where currencies are bought and sold

• Determines exchange rates

• Used by: importers/exporters, tourists investors, governments and central banks

• ultimately enables international trade and investment

Summarise each of the financial markets.

• Money market = short-term finance

• Capital market = long-term finance

• Forex market = exchange of currencies

How might a firm raise finance

1. Issuing shares

2. Issuing corporate bonds

3. Borrowing from a bank

How do firms use bonds to raise finance

What is the difference between debt and equity

• debt = borrowing money that must be repaid, often with interest

• Equity = raising money by selling ownership in the buisness

What are some examples of debt

• bank loans

• Corporate bonds

• Overdrafts

What are some key features of equity

1. Investors become part - owners

2. Investors may receive dividends and capital gains

What are some examples of equity

• issuing shares on the stock market

What kind of relationship is there between interest rates and bond prices.

Inverse relationship

Why is there an inverse relationship between interest rates and bonds?

• Bonds pay a fixed coupon rate

• if interest rates rise, new bonds offer high returns