5

Question 1

5 Impacts of high inflation

Answer 1

Rise in interest rates

Increase in demand for imports and reduction in exports

Tax increases

Cut in public expenditure

Supply can’t keep up with demand so causes delays in production

Question 2

Stagflation

Answer 2

Stagnant inflation growth

Question 3

Inflation target on what indexation?

Answer 3

2% on CPI

Question 4

What effect do interest rates have on a bond?

Answer 4

If they increase then bond value drops and vice versa.

Question 5

How does the duration of a bond effect returns regarding interest rates?

Answer 5

Will rise or fall by a factor of the duration. Eg if interest rates increase by 0.25% and the bond has a factor of 4 then bond will fall by 1%

Question 6

Down grade risk

Answer 6

Credit rating agency downgrade on company which reduces the value of the bond

Question 7

Credit spread risk

Answer 7

Gap between GILTS and corporate bonds increase due to lack of confidence

Question 8

Counterparty risk

Answer 8

Risk that the counterparty will not pay

Question 9

Counterparty on a bond

Answer 9

Insurance company that guarantees payment of a bond if corporate company do not pay

Question 10

Bail-In risk

Answer 10

Firm (usually a bank) receives financial help from within the company eg shareholders and depositors which reduces value of shares or deposits

Question 11

Shortfall risk

Answer 11

Risk of investment underperforming

Question 12

Operational risk

Answer 12

Internal risks, so risks from within the company eg staff errors or misjudgements

Question 13

Gearing

Answer 13

Process of borrowing money, with the objective of purchasing an investment to increase exposure to other assets