Financial Markets

• What is money defined as in financial terms?

  An asset used as a medium of exchange
• What are the characteristics of money?

  • Portable and divisible
  • Widely accepted and durable
  • Difficult to forge
  • Stable in value
• What are the functions of money?

  1. Medium of exchange
  2. Store of value
  3. Measure of value
  4. Standard of deferred payment
• What does the money supply refer to?

  Total amount of money in circulation
• What are financial markets?

  Places where buyers and sellers trade assets
• What do financial markets allow?

  • Trading of financial assets
  • Interaction between buyers and sellers
• What are the types of financial markets?

  1. Money Markets
  2. Capital Markets
  3. Foreign Exchange Market
• What is the purpose of money markets?

  Provide short-term finance for various entities
• What is the repayment period for short-term debt in money markets?

  24 hours to a year
• What do capital markets provide?

  Medium and long-term finance for firms
• How do firms raise funds in capital markets?

  By issuing bonds or shares
• What is the primary market in capital markets?

  Market for new share and bond issues
• What is the secondary market in capital markets?

  Market for existing securities trading
• What is the foreign exchange market used for?

  Buying and selling different currencies
• What is the spot market in foreign exchange?

  For transactions that happen now
• What is the forward market in foreign exchange?

  For transactions at an agreed future time
• What do balance sheets show?

  • Value of bank's assets
  • Liabilities
  • Owner's equity during a period
• What is an asset in banking terms?

  Money collected from customers by the bank
• What is a liability in banking terms?

  Something that must be paid by the bank
• How is owner's equity calculated?

  Assets minus liabilities
• What are reserves in banking?

  Made from retained profits
• What is share capital?

  Money raised when shares were first issued
• Why is owner's equity considered a liability?

  Because reserves belong to depositors
• Why are deposits from savers considered a liability for banks?

  Because banks must pay them back
• What is inter-bank lending?

  Borrowing and lending between banks
• What is the purpose of inter-bank lending?

  To meet short-term liquidity goals
• functions of a commercial bank

  • accept deposits and savings
  • lending to economic agents
  • be financial intermediaries
• components of commercial banks

  1. retail banking - services for small firms and individuals
  2. wholesale banking - dealing with larger firms’ needs