12.1 The Structure of Financial Markets and Financial Assets

What are the 4 main functions of money

Medium of exchange

Measure of value

Store of value

Method of deferred payment

What is the definition of the money supply

The stock of currency and liquid assets in an economy

What does narrow money include

Physical currency (notes and coins) and liquid assets (money in current accounts)

What is broad money

It includes narrow money plus less liquid assets like savings account

What is traded in the money market

Liquid assets

What happens in the capital market

People and companies buy and sell things like shares and long-term loans.

What is the function of the foreign exchange market

Currencies are traded, determining their relative values

What is a financial market

Places where buyers and sellers come together to trade financial assets, such as stocks, bonds, currencies, and derivative

Name two examples of financial markets

The stock market and the bond market

Roles of the financial market

• Facilitate saving

• Support lending

• Facilitate exchange of goods and services

• Provide a market for equities

• Provide forward markets in currencies and commodities

What is debt in finance

Money borrowed that must be repaid with interest

What does equity represent for an individual or firm

Ownership of an asset after all debts have been repaid

What kind of relationship exists between market interest rates and bond prices

An inverse relationship - when interest rates rise, bond prices fall, and vice versa

Why does the price of an existing bond increase when market interest rates decrease

Because the bond’s fixed interest payments become more attractive compared to new bonds with lower rates

What happens to the value of a bond if market interest rates increase

The bond’s price falls since its fixed interest payments are less attractive than new bonds

What is a bond coupon

The interest payment made to bondholders periodically until the bond matures