Medium of exchange, store of value, means of payment
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Definition of the money supply
Keynesianism/monetarism
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Narrow money
The part of the stock of money or money supply made of cash and liquid bank and building society deposits. Reflects the medium of exchange function of money, namely money functioning as a means of payment.
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Broad money
The part of the stock of money or money supply made of cash, other liquid assets such as bank and building society deposits, but also some less liquid assets. The measure of broad money used by the BoE is M4
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Assets and liabilities
When a bank creates an interest earning asset it is simultaneously adding to its deposit liabilities, since it must now honour customer's withdrawals from their deposits of cash or payments they make to other people.
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The role of financial markets in the wider economy
Facilitates savings, boosts AD and AS through lending, allows international trade, globalisation
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Role of the money market
Provides a means for lenders and borrowers to satisfy short term financial needs, short maturities of assets bought and sold on the money market. Enables commercial banks to act as a intermediary linking savers to borrowers
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Role of capital market
Securities such as bonds are issued to raise medium to long term financing, bonds and shares are then traded on the second hand part of the market. Plays a critical role in financing the budget deficit.
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Role of the foreign exchange market
Global markets for the trading of currencies. Main participants are large international commercial banks.
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Difference between debt and equity
Debt is the money people own where as equity is wealth - shares are known as equities.
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Why is there an inverse relationship between interest rates and bond prices?
If bond prices rise, yield or long term interest rates fall, and if bond prices fall, yields of long term interest rates rise.
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How do firms raise finances
Issue shares, issue corporate bonds and borrowing from a bank
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Coupon
The guaranteed fixed annual interest payment, often divided into two 6 month payments, paid by the issue of a bond to the owner of a bond
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Maturity date
The date on which the issuer of a dated security such as a gilt edged security or a treasury bill pays the value of the security to the security's owner
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How to calculate the yield on a bond
Annual coupon payment/gilt's current market price x 100
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Money
Primaryily a medium of exchange or means of payment, but also a store of value
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Liquidity
MPortfolio balance decisioneasures the ease with which an asset can be converted to cash without loss of value. Cash is the most liquid of all assets
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Financial market
Markets in which financial assets or securities are traded.
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Portfolio balance decision
Besides making the distinction between physical and financial assets, arranges financial assets according to liquidity and profitability
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Bonds
Financial securities sold by companies or government which are a form of long term borrowing. Usually have a maturity date on which they are redeemed, with the borrower making a fixed interest payment each year until the bond matures
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Gilts
Fixed interest securities sold by the government when they borrow in the long term.
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Shares
Undated financial assets, sold by a company to raise financial capital. If sold by public companies/PLC's - marketable on the stock exchange, not marketable if sold by a private company. A share signifies that the holder owns part of the enterprise.
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Corporate bonds
Debt security issued by the company and sold as new issues to people who lend long term to the company. Can usually be resold second hand on the stock exchange.
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Government bonds
Debt security, known as gilts, issued by the government and sold as new issues to people who lend long term to the government.
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