6

Question 1

Annual equivalent
rate (AER)

Answer 1

The interest that will be earned on the money in one year, taking into
account how often the provider pays the interest (eg monthly or
annually), the effect of compounding the interest and any fees and
charges

Question 2

Annuity

Answer 2

A product where the customer pays a lump sum (the proceeds of a
pension fund on retirement) and, in return, receives an agreed set
annual amount for the rest of their life

Question 3

Catastrophe bonds

Answer 3

Bonds purchased by investors who receive a good rate of interest as
long as the catastrophe the bond covers does not happen. If it does
occur, then they lose their capital and the insurance company does not
have to pay them back what they invested; this helps the insurer to
lessen its exposure to the disaster.

Question 4

Catastrophic loss

Answer 4

A loss in excess of unexpected loss, which is unlikely but that could
conceivably happen

Question 5

Coronavirus

Answer 5

Coronavirus disease, known as Covid-19, is a respiratory illness that
causes mild to moderate symptoms in a majority of cases but proves
debilitating or fatal for a significant minority. It caused a global
pandemic with wide-ranging economic effects.

Question 6

Cyberterrorism

Answer 6

A situation where terrorists deliberately attack computer networks by
uploading viruses that cause links and files to malfunction and data to
be deleted.

Question 7

ethical investment

Answer 7

An investment made in a company that takes into account the wider
impact of its activities on society and the environment

Question 8

Exogenous shocks

Answer 8

A significant event that happens without warning and that has large
and lasting effects on political, economic, and social systems, eg the
Coronavirus (Covid-19) pandemic.

Question 9

Expected loss

Answer 9

The average amount of loss that someone could expect to face, eg loan
defaults.

Question 10

Gross interest

Answer 10

Interest paid without tax deducted

Question 11

Ijara home purchase
plan

Answer 11

A form of Islamic home purchase plan. The provider buys the client’s
selected property. The provider then sells the property to the client for
the same price under a promise to purchase agreement, with
repayment spread over a term of up to 25 years. The provider is the
registered owner of the property during the repayment term. The client
occupies the property under a lease during the payment term, paying a
monthly amount that combines capital repayment and rent for the
lease. The monthly payment is fixed for 12 months at a time and is
then reviewed to allow for adjustments to the rental element as
appropriate; these adjustments will usually reflect changes in external
interest rates.

Question 12

Index-linked

Answer 12

Rising in line with inflation

Question 13

Islamic home
purchase plan

Answer 13

Methods of buying a home that are compliant with Sharia law, which
forbids Muslims from paying or receiving interest. There are two main
types: Ijara and Murabaha home purchase plans (see separate
definitions)

Question 14

Loan to value (LTV)

Answer 14

The ratio of the size of the loan to the value of the property

Question 15

Money laundering

Answer 15

The process of making ‘dirty’ money (money gained from criminal
activities) ‘clean’ – in other words making it look as though it has been
acquired legitimately

Question 16

Money laundering
office

Answer 16

An employee of a financial provider who must be informed of
suspicious activity in the business that might be linked to money
laundering or terrorist financing, and if necessary report it.

Question 17

Mortgage equity
withdrawal

Answer 17

Additional borrowing based on the difference between the value of a
house and the outstanding mortgage (ie if the house is valued at more
than the amount the owner has to repay on the mortgage)

Question 18

Mortgage
forbearance

Answer 18

When a lender does not seek to repossess a property as soon as the
borrower misses a few monthly payments, instead allowing the
customer to stop paying or make reduced payments for a set period

Question 19

murabaha home
purchase plan

Answer 19

A form of Islamic home purchase plan. The provider buys the property
at an agreed price and then sells it immediately to the client at a
higher price. The exact price depends on the repayment term, which
can be up to 15 years. The higher price charged to the purchaser
reflects the profit element for the provider. A first payment, typically of
around 20 per cent of the property value, is usually required and the
client will then make monthly fixed payments to the provider during
the term. As the property has been transferred to the client, the
property is registered in their name rather than that of the provider

Question 20

Negative real
interest rate

Answer 20

Where the nominal interest rate is lower than the rate of inflation

Question 21

Nominal interest rate

Answer 21

The actual rate of interest received by a saver

Question 22

Pandemic

Answer 22

Where an infectious disease spreads rapidly to many people across a
large region

Question 23

Public sector

Answer 23

The collective name for organisations that are funded through general
taxation, eg schools, healthcare, some welfare services

Question 24

Pure risk

Answer 24

Where risk can only have a downside, eg loss of or damage to
possessions

Question 24

Pure risk

Answer 24

Where risk can only have a downside, eg loss of or damage to
possessions

Question 25

Real income

Answer 25

The value of people’s income in terms of goods and services, ie the
purchasing power of the income or what people can buy with the
income.

Question 26

Real interest rate

Answer 26

The difference between the nominal interest rate received by the saver
and the rate of inflation

Question 27

Real terms

Answer 27

A value adjusted to account for changes in prices, eg real income or
real interest rate. For example, although someone may receive a
nominal pay increase of 5%, if inflation (ie rise in general prices) is 3%
then in real terms the pay increase is approximately 5% – 3% = 2%

Question 28

Retail ring-fencing

Answer 28

Separating the deposit-taking part of a bank or building society from
the rest of its business so that, in the event of financial difficulties, the
ring-fenced deposits of retail customers cannot be used to pay the
debts of the more risky investment section of the bank

Question 29

Sharia law

Answer 29

Rules that devout Muslims follow, which, in relation to personal
finance, prohibit the paying and receiving of interest, which virtually
excludes a strict Muslim from doing any borrowing

Question 30

Speculative risk

Answer 30

Where risk can have either a good or a bad outcome, eg a financial loss
or a financial gain.

Question 31

Unexpected loss

Answer 31

The amount by which the actual loss might exceed the expected loss.