Chapter 1 Flashcards
- Which of the following does the UK Government use to fund its borrowing?
A. Bank deposits and fixed interest investments
B. Fixed interest investments and National Savings and Investments
C. National Savings and Investments and Corporate Bonds
D. Corporate Bonds and bank deposits
B - The government uses two methods to fund borrowing: they issue fixed rate bonds called Gilts, and
they use the saving and deposit products offered by their financial institution, the NS&I. Corporate
bonds, like gilts, offer a fixed rate of interest at regular intervals over a fixed term, but they are
issued by companies rather than the government. Bank deposits are only offered by banks.
- Gilts are loans to the UK Government. Which of the following statements accurately describes one aspect of how gilts work?
A. They pay a variable level of interest once a year
B. They pay a fixed level of interest at regular intervals
C. At the end of the term a percentage of the original capital is returned
D. They are issued by HM Revenue and Customs
B - Gilts are bonds that offer a fixed level of interest at regular intervals. Gilts are issued by the government (not HM Revenue and Customs), and at the end of the term, the gilts return the capital in full.
- Capital markets developed to meet which of the following objectives?
A. To allow individuals to make profitable investment in banks
B. To allow FTSE 100 companies to invest in real assets
C. To provide an asset class for diversification purposes
D. To invest in assets which offer potential for real growth
D - Capital markets developed from the need for investors to gain real growth of their capital (growth over and above inflation). Answers a), b) and c) are false (Note: They also developed to offer companies a way of raising money without borrowing from banks).
- Who oversees the UK payments system?
A. The Payments System Regulator
B. The Bank of England
C. The Payments Council
D. The Association of Payments Clearing Services
B - The Bank of England oversees payment systems in the UK. The Payments System Regulator’s (PSR) main purpose is to ensure the payment systems work well for the users.
- Your client, Jeremy, has asked you to confirm what a discretionary portfolio
management service is. You tell him that it is a service where:
A. an investment bank manages a client’s portfolio information confidentially
B. specialist investment managers make suggestions to the client regarding their investment portfolio for the client to then make the decisions
C. a specialist investment portfolio management service is offered to selected clients
D. specialist investment managers make the investment decisions to meet the client’s investment objectives
D - A discretionary portfolio management service is where specialist investment managers set up and make all the investment decisions for a client’s portfolio to meet their objectives. These tend to be for clients who have substantial amounts to invest. ‘Discretionary’ refers to the fact that decisions are made at the portfolio manager’s discretion.
- Which of the following can be directly attributed to the impact of taxation?
A. The difference in growth rates between property and cash
B. The individual consumer’s ability to make investments
C. The cost of providing state benefits to those in financial difficulty
D. The use of quantitative easing following the financial crisis
B - Higher taxation means consumers have less money coming in each month, which affects their
ability to make investments. Quantitative easing was used following the financial crisis (and the
Covid-19 pandemic) by the Government to inject liquidity into the system. This was done by
buying back gilts, not by taxation. If taxation rates are increased, the Government has more
money to spend on state benefits, but taxation does not directly influence the cost of the state
benefits. Answer a) is also false.
What is reinsurance?
When a large risk is assessed and accepted by a financial institution, then passed to a reinsurance company for a proportion of the premium
3 core services provided by banks
Provision of current accounts
Provision of deposit accounts
Provision of mortgages and loans
What is primarily used to influence short-term interest rates?
The Gilt repo market
Who has responsibility for setting interest rates in the UK?
Monetary policy committee within the Bank of England
What is Quantitative easing?
Alternative method for stimulating the economy
