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level: The Financial Sector and Financial Markets

Questions and Answers List

level questions: The Financial Sector and Financial Markets

QuestionAnswer
What is the Purpose of the Financial Sector?-Banks and other Financial institutions aim to make Money available to those who want to spend more than their Income. -They use the Savings of Someone who doesn't want to spend and give it to people who Do want to Spend. Simple!
How can the Financial Sector carry out its Basic Purpose?-Help People and Firms Save: Via Bank Accounts, Pension Funds, Bonds and other Financial Products -Provide Loans to Firms and Individuals -Allow Equities & Bonds to be Issued and Traded on Capital Markets
Why would Individuals be Engaged in Borrowing Money from the Financial Sector?-Personal Loans: Loans given to Individuals that are paid back after a Small Number of Years. Can be Secured (Backed by an Asset) or Unsecure (Higher Rate of Interest usually) -Mortgages: Loans to buy Property. The Bank Owns the House until its Repaid -Credit Cards: Individuals can borrow Money from a Bank when Purchasing Goods and Services -Pay-day Loans: Short-Term Loans which are Unsecured and have a Higher Interest Rate -Overdrafts: Loans for Firms and Individuals given when their Funds in an Account fall below 0. Fee might be Installed when operating with an Overdraft, and a % Rate on the Money Borrowed
Why would Firms be Engaged in Borrowing Money from the Financial Sector?-Equity Finance: The Firm will share Shares in their Company. As people buy the Shares, the number of Shareholders Increase. -Debt Finance: Borrowing Money that must be Paid Back, with an % Rate. This can be from Financial Institutions or Corporate Bonds -Furthermore, an Overdraft may also be set up
What other Functions does the Financial Sector perform?-Make Trade Easier as Buyers can make Payments Efficiently and Quickly -Provide Insurance Coverage to Firms and Individuals
How can the Financial Sector generate Economic Growth?-If there is an Effective and Efficient Financial Institutions in Place, then Economic Growth can Occur -Since Spending is a Driver of economic growth, The Financial Sector provides a lot of Credit meaning Spending. And lots of Spending is on Credit
How can the Lack of Credit restrict Economic Growth?-Firms with little Credit will be less likely to Grow and thus provide Less Jobs. The Lack of Financial Injection means no Big-Ticket Investments can be done -This is Common in Underdeveloped Nations, or even Developing Nations, where the Financial Sector is Weak
Why is the Banking Industry treated so Differently to most other Private Firms?-Banks are Private-Sector Organisations that aim to make Profit for their Shareholders -But the Problems that can occur in a Banking industry can impact and potentially Destroy the Entire Economy of a Nation. -On top of that, A More Profitable Bank means a Riskier Bank. This can be Catastrophic for such a Nation
What is the Idea behind the Regulation in the Banking Industry?-Reducing the Impacts of Financial Market Failure -Protecting Consumers from ensuring Individuals and Firms act Fairly and Lawfully -Maintaining the Integrity and Stability of Financial institutions and their Services. -Keeping Confidence in the Financial Sector to avoid Sudden Panics.
What happens in a Money Market?-They Provide Short-Term Finance to Banks and other Financial institutions -As well as Governments, Firms, and Individuals. The Repayment period can be up to a year, or even 24 Hours
What happens in a Capital Market?-They Provide Governments and Firms Medium-Long Term Finance. Governments and Firms also can raise Finance by issuing Bonds, Shared, or Borrowing from Banks -Capital Markets have a Primary Market - where New Shares and Bond Issues are - and a Secondary Market - where Existing Securities (Bonds and Shares) are Traded. -Capital Markets allow for Liquidity to be Increased for Firms and Governments.
What happens in the Foreign Exchange Market?-They host Different Currencies and their Selling and Buying Prices. This is done to allow for International Trade and Investment, or even Speculation -Foreign Exchange Markets have a Spot Market: Transactions that happens NOW, and a Forward Market: Transactions that will happen at an Agreed Time in the Future
How do Forward Markets work?-On the Forward Markets, Contracts (Futures) are made at a Price Agreed Today, but for Delivery Later. -Futures help Firms who Export and Import Goods. They can 'Lock in' an Agreed, perhaps Favourable Exchange Rate between the Buyer's and Seller's Currencies. Certainty and Confidence can be Built -However, either Firm could be at a Disadvantage, depending on what occurs to the Exchange Rate. -You can also see Commodities occur in a Forward Market too - Price for a Future Coffee agreed in Advanced
What is the Purpose of Bonds?-Governments and Big Firms issue Bonds to Raise Money. They can be to Finance a Budget Deficit or for new Machinery -Bonds can be sold in the Secondary Market, and Investors can buy it at the Market Price, which may be Bigger or Smaller than the Nominal Value. -When the Bond Matures, the Bondholder is paid the Nominal Value of the Bond by the Issuer.
What is the Coupon and Yield of a Bond? State the Formula that links Yield and Coupon-The Bond's Yield refers to the Annual Return an Investor will get from the Bond. -The Coupon refers to the Amount of Interest Paid to the Bondholder. Yield = Coupon/Market Price x 100