How does the economy work Part 2-min

How does the economy work? Part 2

General idea

We still need to define many other unknowns to explain the most relevant aspects of the economy in a simpler way, so we will be defining and relating them little by little.

Principles of economics

What is the risk premium and what is it for?
One of the most important aspects of the economy is the risk premium. It is an indicator that serves as a reference to measure the risk involved in investing in one country or another, and what is it for? Well, depending on whether the risk premium is higher or lower, we will know which country offers a higher risk.

If the risk premium is higher, it means that it offers less guarantee of the return of our money. However, it will offer a higher profitability in order to attract savers to finance itself.

What is the Euribor and what is it for?
This indicator is generally linked to the interest rate of our variable interest mortgages, that is to say, depending on the value of this indicator, our mortgage will be more expensive or cheaper.
The Euribor is the interest rate that banks pay to borrow capital in the Euro zone. The lower this indicator is, the less interest we will have to pay back for our mortgage.

What is the function of central banks?
A central bank is an institution that is completely separate from the government.
The function of the government is to be in charge of fiscal policy, that is, to manage taxes and public spending, while the function of the Central Bank is price stability (inflation control) and to help the economy grow.
In the case of Spain, our Central Bank is the Banco de España, governed by the European Central Bank.

What is asset securitisation?
It is the process by which a bank that needs liquidity can “exchange” outstanding loans with which it will obtain capital in the future, to a securitisation fund, which will grant the agreed capital to the bank for these loans that have not yet been repaid.

Differences between shares, units and bonds?
Shares represent aliquots of a company’s share capital. They are equity securities and their return depends on the company’s profits.
The holder of these shares becomes the owner of the company in proportion to the number of shares held. They are issued by public limited companies and are freely transferable.
Participations share the same characteristics as shares, except that they are issued by limited companies and are not freely transferable; in order to sell them, the authorisation of the other owners is required.
Debentures are completely different from the above. They represent the aliquot part of a company loan, i.e. a debt. They are fixed-income securities, with a pre-agreed interest rate, and therefore do not depend on the company’s performance. The holder is not the owner, but a creditor (money is owed to him). They are issued by public limited companies and limited companies with some restrictions and are freely transferable.


Leave a Reply

Your email address will not be published. Required fields are marked *

Captcha loading...

Be sure to contact me if you have any questions!

Seraphinite AcceleratorOptimized by Seraphinite Accelerator
Turns on site high speed to be attractive for people and search engines.