3) Banking Flashcards
1
Q
What are retail banks? And how do they work?
A
- highstreet banks that provide services to individuals
- like gone the bank will try to attract deposits to make loans to others
2
Q
How do retail banks generate a surplus?
A
- they raise a surplus because the interest they pay on deposits is less than the interest that are paid on loans
- these can then be be used to pay wages, rent cost etc
- anything remaining after this is considered a profit
3
Q
What are commercial banks?
A
- in the US, it is an umbrella term for all banks that take deposits and grant loans
4
Q
What is corporate banking?
A
- banks that specialise in taking deposits and providing loans to businesses
- outside the US, they are referred to as commercial banks
5
Q
What are the different forms of retail borrowing?
A
- loans
- mortgages
- overdrafts
6
Q
What are the standard features of a loan?
A
- for a set period - generally less than 5 years
- at a set rate of interest
- with a defined repayment schedule
7
Q
What is an unsecured loan?
A
- a loan in which the bank does not require any security to be handed over to it while the loan is outstanding
- usually a feature of any normal loan
8
Q
What is a mortgage?
A
- loans that are taken out to buy property
- because they are of substantial sums of money, they are generally repaid over longer periods
9
Q
What is a secured loan?
A
- if the borrower fails to make scheduled repayments, the bank can take the property in order to repay the loan
- often a feature of mortgages
10
Q
What are the features of mortgages?
A
- for a set period
- at a variable rate of interest - that can increase or decrease to stay in line with the general interest rates
- with a defined repayment schedule
- secured on the property that the loan is used to buy
11
Q
What is an overdraft facility?
A
- a flexible policy that you can draw, repay and draw again up to the overdraft limit
- at a variable rate of interest + an arrangement fee must also be payable
- unsecured and repayable on demand
12
Q
How does a credit card work?
A
- an individual applies for a credit card and is granted one with a borrowing limit
- they can then use the card to make purchases and with each purchase, the borrowed amount increases
- part of that money needs to paid off monthly. If not, then a lot of interest is usually incurred - around 20% pa
13
Q
What are the characteristics of a credit card?
A
- flexible - able to be used up to the credit limit
- at a variable rate of interest - tends to be expensive
- repayments of at least a minimum amount are required monthly
14
Q
What are some other forms of borrowing money once banks and card issuers have reached the max. Lending available?
A
- pawnbrokers
- payday loans
15
Q
How is money obtained from pawnbrokers?
A
- something of value is required as a security like jewellery
- this is held onto and stored until the loan is repaid
- the decision on the loan is made immediately by the pawnbroker
- the interest rate charged on borrowing is much greater than others
16
Q
What are payday loans?
A
- loans that enable the buyer to get hold of cash before they are paid by their employer
- very expensive form of borrowing
17
Q
What limit was imposed on the rate of interest in the UK?
A
- since January 2015, UK-asked pay lenders can charge no more than 0.8% per day
18
Q
What are the characteristics of pawnbrokers and payday loans?
A
- easily available - decisions tend to be made immediately
- very expensive in comparison to other forms of borrowing
- for pawned items, repayment is required to regain possession of the item of the pawnbroker
- for payday loans, loans are very short-term, with repayment required at the next payday
19
Q
What are student loans?
A
- loans available to students to be able to pay living costs like accommodation
- the loans are often made available at attractively low rates of interest, and the borrowers do not need to start paying the loans back until they earn wage above a pre-determined level - over 27,295
20
Q
How must the interest rate be disclosed?
A
- the regulatory authorities require by lenders to quote rates on a comparable basis
- the quoted rate has to be made available on an annual basis
21
Q
What is the effective annual rate?
A
- takes the quoted rate and adjusts it to take into account the frequency of interest charges aka as compound interest
- if the frequency of charging interest is the same then: quoted rate = effective annual rate but if E.A.R is charged more frequently then annually. Then E.A.R > quoted rate
22
Q
How do you calculate the effective annual rate? (Method 1)Q
A
23
Q
How is effective annual rate calculated? (Method 2)
A
24
Q
Why do lenders want security of a property in a mortgage?
A
- in the event of financial hardship for the borrower, the bank can take and sell the property if it needs to
- since they only loan a proportion of the value, the bank has a reasonable safety net against property prices falling
25
What kind of loans are secured?
- mortgages
- loans from pawnbrokers
26
Why are unsecured loans more expensive than secured ones?
- the risk to the lender is much greater
27
Why is it cheaper to borrow on a secured basis?
- for the lender, secured borrowing provides a safety net so there is less risk, therefore less reward
- that is why a bank will invariably offer mortgage loans at a lower interest rate than an unsecured loan
28
What are investment banks? And what do they do?
- specialists in large-scale capital raising
- when a firm seeks to raise long-term finance, they will go to an investment bank for advice
- an investment bank executes deals on behalf of the firm by putting together paperwork and marketing the deal to potential investors
- another line of business is M&A, where investment banks advise companies on their business strategy, esp on how they can grow
29
What is capital? And what are the two forms of it?
- long term finance and is required by companies and governments
- comes in the forms of equity and debt (bonds and loans)
30
What conditions affect how much bank is willing to lend?
- when banks have plentiful funds, they tend to be willing and able to lend at competitive interest rates
- when they are less willing to lend, companies that want to borrow have little choice other than the bond market
31
When is it more appropriate to borrow
- if the company is raising finance for something that can be easily sold then borrowing is more appropriate because the asset being purchased can be used as security against the loan
e.g. property because it retains most of its value and can be sold relatively easily so that the borrowed money can be repaid
32
When is it more appropriate to buy equity than borrowing?
- when finance is being raise from item that are more risky, equity tends to be a more logical choice.
- if the outcome is uncertain, paying the interest and then repaying the money becomes difficult
- by raising equity, there is no need to pay, and dividends on equity are unlike interest - no requirements to pay dividends at all
33
What are some examples of central banks?
- Bank of England
- Federal Reserve
- European Central Bank
34
What do central banks do?
- acts as a banker to the banks - they hold the cash reserves of various banks. -> when someone transfers money from their citi account to another person’s HSBC account, the money moves across the two banks via their accounts at the central bank.
- act as a ‘lender of the last resort’ to struggling banks
- banker for the govt: they accumulate the nation’s tax receipts and payments to various govt departments will be drawn from accounts in the central bank.
- as well as holding the foreign currency reserves, the majority of central banks also issue notes on behalf of the govt
- regulatory role: central banks license banks to operate and oversees their activities
- sets the appropriate interest rate in order to control inflation
