financial markets

• Where does the money that banks lend come from?

  From savers who spend less than their income
• What products do financial institutions create for savers and borrowers?

  • For savers: bank accounts, pension funds
  • For borrowers: loans, mortgages
• What are personal loans?

  Loans to individuals over a small number of years
• What distinguishes secured loans from unsecured loans?

  Secured loans are backed by an asset
• What happens if a borrower defaults on a secured loan?

  The bank can sell the asset to recover debt
• What is an example of a secured loan?

  A mortgage on a house
• What are unsecured loans?

  Loans with no asset backing them
• What is a mortgage?

  A loan used to buy property
• How do credit cards function?

  They allow spending up to a borrowing limit
• What are pay-day loans?

  Short-term, unsecured loans for emergencies
• What is a significant risk associated with pay-day loans?

  Interest rates can exceed 1000% per year
• What is an overdraft?

  A pre-agreed loan from the bank
• What distinguishes planned overdrafts from unplanned overdrafts?

  Planned overdrafts have an agreement with the bank
• What are the two main forms of finance for firms?

  Debt finance and equity finance
• What is debt finance?

  Borrowing money that must be repaid with interest
• What is equity finance?

  Issuing shares in return for a share of profits
• Why are financial institutions necessary?

  They facilitate borrowing and lending activities
• How do banks reduce information failure in lending?

  By gathering borrower information before matching loans
• How do banks aid economic growth?

  By providing easy payment methods for purchases
• What types of financial markets should you know about?

  Money markets, capital markets, foreign exchange markets
• What do money markets provide?

  Short-term finance for various entities
• What are capital markets used for?

  Medium to long-term finance
• What is the primary capital market?

  Market for new shares and bonds
• What is the secondary capital market?

  Market where second-hand assets are traded
• What is the foreign exchange market?

  Market that trades currency
• What is the spot market?

  Market for immediate transactions
• What is the forward market?

  Market for future transactions at an agreed time
• How do forward markets help firms?

  They reduce exchange rate risk for transactions
• What are bonds?

  A form of borrowing through promises to repay
• What does it mean to be a bondholder?

  You own a bond and expect repayment
• What can bondholders do with their bonds?

  They can sell them in secondary markets
• What is a yield in relation to bonds?

  A return on investment similar to interest
• How do you calculate the yield of a bond?

  Yield % = [Coupon / Market Price] x100
• What is the yield percentage if the coupon payment is £7 and the market price is £80?

  8.75%
• What happens when a bond matures?

  The bondholder is repaid the nominal value
• What have we learned about the financial sector?

  • Purpose of banks
  • Financial products
  • Financial markets
  • Bonds
• What are the primary roles of commercial banks?

  Accept savings, lend, move funds, allow payments
• What is the role of commercial banks as financial intermediaries?

  They move funds from lenders to borrowers
• What additional products do commercial banks offer?

  Insurance and financial advice products
• What is retail banking?

  Providing banking services to individuals and small firms