Understanding the financial world

General effect of cutting interest rates

Cheaper borrowing > more spending

Going short v going long

How money market traders for banks anticipate rates. If they expect rates to rise, they will borrow more than they lend (short) because they can then lend money when rates are higher, and vv

Effect of value of pound on foreign investments

If pound value rises, that of foreign investments will fall and vv

What are trusts and what are the two types

Channel funds of small investors into equity markets. Unit and investment trusts

What do underwriters do

In return for fee, will guarantee to buy shares at set price if no one else will

Why did the credit crunch happen?

1. Banks became reluctant to lend to each other and outside investors unwilling to lend to banks

2. LIBOR rose sharply, so borrowing costs for everyone rose sharply too

3. Central banks lent directly to money markets to ease pressure but it was hard for companies to obtain money at reasonable price so struggled to refinance themselves

4. Those who had borrowed money to buy assets forced to sell, further lowering prices

Why have investment institutions grown?

People’s higher wealth and life expectancy

Why is property a good long-term investment?

1. Good yield

2. Record of more than keeping pace with inflation

Cons of property as long-term investment

Illiquid - most difficult to sell when you really want to (when prices falling)

Admin burden - finding tenants, maintaining buildings

What is LIBOR?

London Interbank Offered Rate - rate at which bank prepared to lend to another bank

Difference between stock exchange and money markets

Stock exchange for long term investments in shares and govt bonds. Money markets for short term (under 1 yr) investments

What is a security?

Something valuable borrower promises to hand over to the lender if they can’t repay the loan - the lender could sell it to recover lost money

What is the S&P 500?

Stock market index tracking the stock performance of 500 leading companies listed on US stock exchanges

What are the 4 types of financial assets?

1. Loans - lending money and charging interest

2. Bonds - investors buy them from companies, meaning investors lend money and receive interest payments and return of principal amount upon maturity. Investors can sell bonds

3. Equities - offer share in company’s assets and profits - ownership

4. Derivatives - contracts with value derived from underlying asset/rate/index

How does the supply and demand theory explain interest rates? When do rates rise and fall?

If more funds available from savers/industry has less need to borrow, rates fall and vv

What do retail banks do?

Take deposits and make loans

What do investment banks do? x4

1. Advise clients eg on takeovers, handling currency risks

2. Broking (connect buyers and sellers in return for fee)

3. Market trading

4. Asset mgmt (looking after other people’s money)