Financial markets

• Money supply


  The total supply of money
• Types of money supply

  • Narrow money
  • Broad money
• Narrow money


  Money that is ready to spend immediately such as cash and credit cards
• Broad money


  All narrow money + money in savings accounts, checks or government bonds
• Money that is harder to access and can't be spent immediately

  Broad money
• Financial markets


  • Money market
  • Capital market
  • Foreign Exchange market
• Money market


  Where you can buy and sell short term financial assets like overdrafts
• Capital market


  Where you can buy and sell long term financial assets
• Foreign Exchange market


  Where you can buy and sell foreign currencies
• Ways a business can raise finance

  • Debt
  • Equity
• Debt


  • Borrowing money by taking out a loan from the bank
  • Borrowing money from investors by issuing corporate bonds
• Equity


  • The percentage of a company owned
  • Selling the percentage of the company to investors through shares
• Maturity


  When the final interest on a bond must be paid
• Coupon rate


  Annual interest received on a bond
• Bond yield


  The interest received on a bond
• Bond yield calculation


  Yield = (payoff/bond price) x 100
• Types of banks


  • Commercial bank
  • Investment bank
• Commercial bank


  • Putting money in savings accounts, mortgages, withdrawals
  • High street banks like Barclays
• Investment bank


  • Make investments through buying shares
  • Sell them at higher prices to make a profit
• Components of a commercial bank's balance sheet

  • Assets
  • Liabilities
• Assets


  The money the bank has - includes cash
• Liabilities


  The money the bank owes
• The more money a bank lends out

  The more profit it makes, however it will reduce the amount of cash it has which will lower its liquidity
• Liquidity ratio


  Liquid assets / deposits
• A low liquidity ratio is bad as it means banks will be unable to give the money to customers asking to withdraw their deposits
• The higher a bank's liquidity ratio, the more cash it must repay customers who've deposited their money at the bank
• Capital ratio


  The amount of capital a bank has compared to its loans, ratio = capital: loans
• A low capital ratio is bad as it can't rely on the owner's money that was invested
• A high capital ratio is good because the bank can use the owner's money to repay any debts