The structure of financial markets and financial assets

• What is one of the primary functions of money?

  A medium of exchange
• How did transactions occur before the use of money?

  Transactions were conducted through bartering
• What problem does using money eliminate in transactions?

  The need for a double coincidence of wants
• What does money provide as a measure of value?

  A means to measure the relative values of different goods and services
• How does money put a value on labor?

  By providing a price for labor services
• Why must money hold its value?

  To be used for payment over time
• What does the quantity of goods and services that can be bought with money depend on?

  The forces of supply and demand
• What does money allow for in terms of debts?

  It allows for debts to be created and paid later
• 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 and deposits in the central bank
• What is broad money?

  It includes the entire money supply, both liquid and less liquid assets
• What is traded in the money market?

  Liquid assets
• What is the purpose of the capital market?

  To buy and sell equity and debt instruments for long-term use
• What is the primary function of the foreign exchange market?

  To trade currencies and determine their relative values
• How do financial markets facilitate saving?

  By providing a place for consumers and firms to store funds
• How do financial markets aid in lending to businesses and individuals?

  By transferring funds between agents for investment or consumption
• What role do financial markets play in the exchange of goods and services?

  They facilitate the transfer of real economic resources
• What is a forward market?

  An informal financial market for contracts for future delivery
• What do equity markets involve?

  The trade of shares and access to capital for firms
• What is the definition of debt?

  Money borrowed from a lender that must be repaid with interest
• What is equity?

  A stock or security representing ownership in an asset
• What is the relationship between market interest rates and bond prices?

  There is an inverse relationship between them
• Why does a bond become more valuable when market interest rates fall?

  Because it carries a higher interest rate than current market conditions
• What is a coupon in relation to government bonds?

  An interest payment to the bondholder
• What does maturity refer to in financial assets?

  The period of time for which the financial asset is outstanding
• What are the main characteristics and functions of money?

  • Medium of exchange
  • Measure of value (unit of account)
  • Store of value
  • Method of deferred payment
• What are the differences between narrow money and broad money?

  • Narrow money: physical currency and deposits in the central bank
  • Broad money: entire money supply, including liquid and less liquid assets
• What are the roles of financial markets in the economy?

  • Facilitate saving
  • Lend to businesses and individuals
  • Facilitate exchange of goods and services
  • Provide forward markets in currencies and commodities
  • Provide a market for equities
• What are the methods firms can use to raise finance?

  • Issuing shares
  • Issuing corporate bonds
  • Borrowing from a bank
• What are the characteristics of corporate bonds?

  • Issued to raise funding for large projects
  • Can be traded like shares
  • Partially protected against variable interest rates
• What is the significance of dividends in equity markets?

  • Share of the firm's profits
  • Paid to shareholders based on future performance
• What are the implications of high interest rates for borrowing?

  • Can be expensive for firms
  • May be unaffordable for new, smaller firms
• What is the role of speculative attacks in currency markets?

  • Affect the value of the exchange rate
  • Can lead to fluctuations in currency value