4.4.1

• The Money Market

  • Market for short term loan finance for businesses and households
  • Money is borrowed and lent up to 12 months
  • Includes inter-bank lending i.e. the commercial banks providing liquidity for each other
  • Includes short-term government borrowing e.g. 3-12 months Treasury Bills to help fund the government's budget (fiscal) deficit
• Capital Market

  • Market for medium to longer term loan finance e.g. shares and bonds
  • Includes raising of finance by governments through the issue/sale of medium to long term government bonds e.g. 10 year and 20-year bonds (loans)
• Foreign Exchange Market

  • A market where currencies (foreign exchange) are traded. There is no single currency market - it is made up of thousands of trading floors
  • Gains or losses are made from exchange rates - speculative activity in the currency market is often high
  • The spot exchange rate is the price of a currency to be delivered now, rather than in the future
  • The forward exchange rate is fixed price given for buying a currency today to be delivered in the future
• What are the key roles of financial markets?

  • To facilitate saving by businesses and households: offering a secure place to store money and also earn interest
  • To lend to businesses and individuals: financial markets provide an intermediary between savers and borrowers
  • To allocate funds to productive uses: financial markets allocate capital to where the risk-adjusted rate of return is highest
  • To facilitate the final exchange of goods and services: they provide payments mechanisms e.g. contactless payments
  • To provide forward market currencies and commodities
  • To provide a market for equities
• Key functions of money

  1. Medium of exchange
  2. Store of value
  3. Unit of account
  4. Standard of deferred payment
• Narrow money


  The narrow money definition of the money supply is a measure of the value of coins and notes in circulation and other money equivalents that are easily convertible into cash as short-term deposits in the banking system
• Broad money


  Broad money is a measure of the total money held by households and companies in the economy.

  Broad money is made up mainly of commercial bank deposits - which are essentially IOUs from commercial banks to households and companies - and currency - mostly IOUs from the central bank
• Key features of bank loans

  • Loan is provided over a fixed period (e.g. 5 years)
  • Rate of interest payable is either fixed or variable
  • Timing and interest of loans repayments are set by the lender e.g. a commercial bank
  • Non-performing loans ("bad debts") occur when the borrower is unable to repay some or all of the debt
• Unsecured loans


  Money supported only by a borrower's creditworthiness, rather than by any type of collateral
• Secured loans


  Money you borrow that is secured against an asset you own, usually your home