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Economics 4.4.1

Economics- Edexcel 4.4.1

TermDefinition
Money market market for short term loan finance for businesses and households, loans are usually up to 12 months
What does the money market include? inter-bank lending and short term government borrowing
Capital market market for medium and longer-term loan finance where securities such as shares and bonds are issued
Foreign exchange market market where currencies are traded
Spot exchange rate price of a currency to be delivered now rather than in the future
Forward exchange rate fixed price given for buying a currency today and delivered in the future
Financial market any exchange that facilitates the trading of financial instruments on both a national and global level
Narrow money measure of the value coins and notes in circulation and other money equivalents that are easily convertible into cash
M1 narrow money
Broad money measure of total money held by households and companies in the economy, mainly made up of commercial bank deposits
Long-term loans finances whole business over many years
Medium-term loans finances major projects or assets with long life
Short-term loans finances day-to-day trading of a business
Debt financing borrowing money from an outside source with the promise of paying back the borrowed amount plus the agreed-upon interest, later
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
Angel investors individuals who inject capital for business start-ups
Venture capital firms specialising in building high risk equity portfolios
Stock market listing offering shares to the public and institutional investors via an initial public offering (IPO)
Crowd funding raising capital from many individual investors via platforms such as crowd cube
Commercial bank function provide retail banking services to household and business customers
What are commercial banks licensed to do? they are licensed deposit-takers providing savings account and licenced to lend money
Bank’s business model relies on what? charging a higher interest rate on loans than the rate paid on deposits
How do banks create credit? extending loans to businesses and households
How do commercial banks make a profit? interest-rate spreads, service fees, brokerage percentages
interest -rate spreads charging a higher interest rate on loans than the rate that is paid to servers
Brokerage percentages many banks provide currency and share-dealing services and charge a brokerage fee to customers for doing so
How can banks fail? run on the bank, credit crunch or high losses from bad debts
Run on the banks when depositors panic and withdraw their savings dearing that the bank is collapsing, creating a liquidity crisis for the bank
Credit crunch bank may be unable to borrow money from other banks even on an overnight basis
High losses from bad debts loan default rate might rise in a recession as borrowers struggle to make loan repayments then the credit rating of bank declines and share prices fall, making it harder to raise new finance
Limits to credit creation by banks market forces, regulatory policies,behaviour of consumers and businesses, monetary policy
Liquidity risks for commercial banks banks cannot repay all deposits if savers decide to withdraw their funds in one go
How do banks reduce liquidity risks? try to attract long term deposits but hold some liquid assets cash as capital reserves
Credit risk for commercial banks risk to a bank of lending to borrowers who turn out to be unable to repay some or all of their loans
How can credit risk be controlled? by research into the creditworthiness of borrowers and banks have sufficient capital in reserve- a minimum is imposed by financial authorities
Investment banks provides specialised services for companies and large investors, trades and invests on its own account
What can commercial banks provide investment banks? banking services
Created by: jessharris
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