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Economics 4.4.1
Economics- Edexcel 4.4.1
| Term | Definition |
|---|---|
| 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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