| What is the Purpose of the Financial Sector? | -Banks and other Financial institutions aim to make Money available to those who want to spend more than their Income.
-They use the Savings of Someone who doesn't want to spend and give it to people who Do want to Spend. Simple! |
| How can the Financial Sector carry out its Basic Purpose? | -Help People and Firms Save: Via Bank Accounts, Pension Funds, Bonds and other Financial Products
-Provide Loans to Firms and Individuals
-Allow Equities & Bonds to be Issued and Traded on Capital Markets |
| Why would Individuals be Engaged in Borrowing Money from the Financial Sector? | -Personal Loans: Loans given to Individuals that are paid back after a Small Number of Years. Can be Secured (Backed by an Asset) or Unsecure (Higher Rate of Interest usually)
-Mortgages: Loans to buy Property. The Bank Owns the House until its Repaid
-Credit Cards: Individuals can borrow Money from a Bank when Purchasing Goods and Services
-Pay-day Loans: Short-Term Loans which are Unsecured and have a Higher Interest Rate
-Overdrafts: Loans for Firms and Individuals given when their Funds in an Account fall below 0. Fee might be Installed when operating with an Overdraft, and a % Rate on the Money Borrowed |
| Why would Firms be Engaged in Borrowing Money from the Financial Sector? | -Equity Finance: The Firm will share Shares in their Company. As people buy the Shares, the number of Shareholders Increase.
-Debt Finance: Borrowing Money that must be Paid Back, with an % Rate. This can be from Financial Institutions or Corporate Bonds
-Furthermore, an Overdraft may also be set up |
| What other Functions does the Financial Sector perform? | -Make Trade Easier as Buyers can make Payments Efficiently and Quickly
-Provide Insurance Coverage to Firms and Individuals |
| How can the Financial Sector generate Economic Growth? | -If there is an Effective and Efficient Financial Institutions in Place, then Economic Growth can Occur
-Since Spending is a Driver of economic growth, The Financial Sector provides a lot of Credit meaning Spending. And lots of Spending is on Credit |
| How can the Lack of Credit restrict Economic Growth? | -Firms with little Credit will be less likely to Grow and thus provide Less Jobs. The Lack of Financial Injection means no Big-Ticket Investments can be done
-This is Common in Underdeveloped Nations, or even Developing Nations, where the Financial Sector is Weak |
| Why is the Banking Industry treated so Differently to most other Private Firms? | -Banks are Private-Sector Organisations that aim to make Profit for their Shareholders
-But the Problems that can occur in a Banking industry can impact and potentially Destroy the Entire Economy of a Nation.
-On top of that, A More Profitable Bank means a Riskier Bank. This can be Catastrophic for such a Nation |
| What is the Idea behind the Regulation in the Banking Industry? | -Reducing the Impacts of Financial Market Failure
-Protecting Consumers from ensuring Individuals and Firms act Fairly and Lawfully
-Maintaining the Integrity and Stability of Financial institutions and their Services.
-Keeping Confidence in the Financial Sector to avoid Sudden Panics. |
| What happens in a Money Market? | -They Provide Short-Term Finance to Banks and other Financial institutions
-As well as Governments, Firms, and Individuals. The Repayment period can be up to a year, or even 24 Hours |
| What happens in a Capital Market? | -They Provide Governments and Firms Medium-Long Term Finance. Governments and Firms also can raise Finance by issuing Bonds, Shared, or Borrowing from Banks
-Capital Markets have a Primary Market - where New Shares and Bond Issues are - and a Secondary Market - where Existing Securities (Bonds and Shares) are Traded.
-Capital Markets allow for Liquidity to be Increased for Firms and Governments. |
| What happens in the Foreign Exchange Market? | -They host Different Currencies and their Selling and Buying Prices. This is done to allow for International Trade and Investment, or even Speculation
-Foreign Exchange Markets have a Spot Market: Transactions that happens NOW, and a Forward Market: Transactions that will happen at an Agreed Time in the Future |
| How do Forward Markets work? | -On the Forward Markets, Contracts (Futures) are made at a Price Agreed Today, but for Delivery Later.
-Futures help Firms who Export and Import Goods. They can 'Lock in' an Agreed, perhaps Favourable Exchange Rate between the Buyer's and Seller's Currencies. Certainty and Confidence can be Built
-However, either Firm could be at a Disadvantage, depending on what occurs to the Exchange Rate.
-You can also see Commodities occur in a Forward Market too - Price for a Future Coffee agreed in Advanced |
| What is the Purpose of Bonds? | -Governments and Big Firms issue Bonds to Raise Money. They can be to Finance a Budget Deficit or for new Machinery
-Bonds can be sold in the Secondary Market, and Investors can buy it at the Market Price, which may be Bigger or Smaller than the Nominal Value.
-When the Bond Matures, the Bondholder is paid the Nominal Value of the Bond by the Issuer. |
| What is the Coupon and Yield of a Bond? State the Formula that links Yield and Coupon | -The Bond's Yield refers to the Annual Return an Investor will get from the Bond.
-The Coupon refers to the Amount of Interest Paid to the Bondholder.
Yield = Coupon/Market Price x 100 |
