Financial Markets (Theme 4)

• What are financial markets?

  Places where buyers and sellers trade financial assets
• What is the primary role of financial markets?

  To connect lenders with borrowers
• Who are considered lenders?

  Savers and investors with excess cash
• Who are typical borrowers?

  Individuals and firms needing cash now
• What do individuals typically borrow money for?

  Buying houses and cars
• Why do firms borrow money?

  To invest and grow their business
• Why might governments need to borrow money?

  To finance expenditures like healthcare and education
• What is the challenge for lenders and borrowers?

  Finding each other without financial markets
• How do lenders use bond markets?

  By buying government bonds to lend money
• What do lenders do in stock markets?

  Buy shares to invest in companies
• What is the role of financial intermediaries?

  To connect lenders and borrowers
• How do commercial banks operate?

  They take deposits from lenders and make loans
• What do commercial banks charge on loans?

  A higher interest rate than they pay to lenders
• What is the profit model for commercial banks?

  Difference between loan interest and deposit return
• What do pension funds do?

  Invest money for retirement and pay annuities
• How do hedge funds differ from mutual funds?

  Hedge funds engage in riskier transactions
• What is a key characteristic of mutual funds?

  They are less risky than hedge funds
• What do both hedge funds and mutual funds do?

  Collect money from investors to buy debt
• What is the primary function of financial markets?

  To connect those with excess money to those in need
• What are the types of financial intermediaries?

  • Commercial banks
  • Investment banks
  • Pension funds
  • Hedge funds
  • Mutual funds
  • Stock exchanges
  • Insurance companies
• What is the difference between lenders and borrowers in financial markets?

  • Lenders: Have excess cash, seek returns
  • Borrowers: Need cash, willing to pay interest
• What is the basic difference between hedge funds and mutual funds?

  • Hedge funds: Riskier, less regulated
  • Mutual funds: Less risky, more regulated
• What is interbank lending?

  Commercial banks lending to each other
• What is the maturity date for assets in capital markets?

  Greater than one year
• What is the difference between debt capital and equity capital?

  Debt capital pays interest; equity capital pays dividends
• What type of capital includes government bonds with a maturity greater than one year?

  Debt capital
• What are the two types of capital markets?

  Primary market and secondary market
• What happens in the primary capital market?

  New bonds and shares are issued
• What is the role of the secondary market?

  Buying and selling existing bonds and shares
• What are the two types of currency markets?

  Spot markets and futures markets
• What is a spot market?

  Buy currency at the current exchange rate
• Why would someone use a futures market?

  To hedge against future exchange rate changes
• How do importers use futures markets?

  To protect against weaker future exchange rates
• What is the purpose of speculation in futures markets?

  To profit from expected changes in exchange rates
• What are the key characteristics of money markets?

  • Assets with maturity of one year or less
  • High liquidity
  • Includes interbank lending
• What are the key characteristics of capital markets?

  • Assets with maturity greater than one year
  • Includes debt and equity capital
  • Primary and secondary markets for trading
• What are the three types of financial markets?

  Money markets, Capital markets, Currency markets
• What is a financial market?

  It's where buyers and sellers trade financial assets
• What is the maturity date for assets in money markets?

  One year or less
• What types of assets are traded in money markets?

  Financial assets with a maturity of one year or less