| What is the Idea between Assets and Liability? | -When a Commercial Bank dishes out Loans to Customers, Money is Created
-The Customer becomes a Debtor to the Bank. They must Repay the Loan + Interest on it
-Hence, the Loan becomes an ASSET for the Bank
-The Customers Deposit is an LIABILITY for the Bank |
| What, and why, is Inter-bank Lending? | -This Lending only occurs between Banks, and Occurs on the Inter-Bank Lending Market. The Loans are usually Very Short Term
-This Market exists as some Banks will have Excess Liquidity, and others will have a Lack of Liquidity. This Market aims to Distribute the Excesses.
-The Rate that is Charged is called the Inter-Bank Lending Rate |
| What is a Balance Sheet? | -Essentially, a Document detailing a Firms Assets and Liabilities on a Date of any time
-A Balance Sheet should always have the Total Assets = Total Liabilites |
| From Most to Least Liquid, Sort the Assets in that order (This is for a Banks Balance Sheet) | 1. Cash. Simple Enough
2. Balances at the Bank of England
3. Money at Call and Short Notice (Interbank lending)
4. Commerical and Treasury Bills (Similar to Bonds)
5. Investments (Bonds)
6. Advances (Money the Bank has Lent out)
7. Fixed Assets (Land and Houses |
| What are the Liabilities that Banks must deal with? | -Banks Capital: Money Raised when its Shares was First Issued, and the Reserves which come from Retained Profits
-Deposits from Savers
-Short Term and Long Term Borrowing |
| How does a Bank's Balance Sheet always make it Equal? What if it doesn't? | -Usually, if the Value of a Bank's Asset Falls, the Bank's Capital is also Reduced by the Same Amount
-If a Borrower had Defaulted on a Loan, the Value of that Loan as an Asset would Fall, and the Banks Level of Capital would also Fall
-If the Total Value of the Bank's Asset fell by a Large Amount, the Bank could 'Run Out of Capital' making the Bank Insolvent. This usually leads to a Collapse in the Bank as Central Banks don't Lend to Insolvent Banks |
| What are the 3 things that Banks need to achieve a Balance of? | -Profitability, Security and Liquidity
-If someone defaults on a Secure Loan (Mortgage) then the Bank can Repossess the House that had been used as a Security, which is Helpful for the Bank
-Had it been an Unsecure Loan, then the Bank would completely Lose that Asset |
| What is the Market Interest Rates and Bond Prices Relationship? | -Inversely Proportional. As One Rises, the Other Falls
-As the Interest Rates Rise, Bond Prices will fall
-If the Bond had a Nominal Value of $100, and had a Coupon of $5, and if Interest Rates were 8% - Find the Market Price of the Bond.
-The Yield would be Coupon/Market Price so Market Price = Coupon/Yield -->$5/8 x100 - $62.50
-That is what you expect, considering Interest Rates have Risen |
