CHAPTER 1 SECTION 1:

Question 1

What are the 4 ESSENTIAL FUNCTIONS financial services perform?

Answer 1

1. Provide access to & and protect consumer savings
2. Allow lending of savings to others to meet consumer borrowing demands
3. Provide protection against risks eg: death
4. Disperse risk via investment into different products

Question 2

What is main role deposit holders play?

Answer 2

Provide funds for lending purposes

Question 3

What is bank ownership structure & how are profits shared?

Answer 3

Banks owned by shareholders who receive dividends from their investment

Question 4

What is a building society ownership structure & how are profits shared?

Answer 4

Owned by share account savers

Higher interest rates on accounts & lower interest rate loan charged

Question 5

What do banks & building societies convert short term savings into?

Answer 5

Long term lending

Question 6

What is a proprietary company?

Answer 6

A bank owned by its shareholders

Question 7

What is a mutual organisation?

Answer 7

A building society owned by its savers

Question 8

Which type of company (proprietary vs mutual organisation) accounts typically offers higher rates of interest & why?

Answer 8

Mutual company as does not have shareholders to please so can offer higher rates to its members.

Question 9

What is the government bank called?

Answer 9

Bank of England

Question 10

What is one way government raises money from the public to fund public spending?

Answer 10

Borrowing money from the public

Question 11

What are two methods of government borrowing & explain what they are?

Answer 11

1. GILTS: Loans to BofE pay fixed annual interest over term, at end of term original capital returned to investor.
2. NS&I BANK: Range of deposit based savings.

Question 12

What is Public Sector Net Cash Requirement (PSNCR)?

Answer 12

The difference between money brought in by government (usually via tax) vs money needed to spend (eg state benefits).

Question 13

Is a deficit or surplus more common for Public Sector Net Cash Requirement (PSNCR)?

Answer 13

DEFICIT

Question 14

How is a deficit typically funded by the government?

Answer 14

Borrowing money from public via GILTS & NS&I products.

Question 15

How do financial services companies help reduce government borrowings?

Answer 15

Investing in GILTS.

Question 16

What is the principle of insurance & risk management?

Answer 16

To safeguard assets from financial loss.

Question 17

How do mainstream financial service companies insure themselves against the risk of a claim?

Answer 17

Use services of a REINSURANCE COMPANY.

Question 18

How do investment managers manage risk & offset losses?

Answer 18

Use of DERIVATIVES.

Question 19

What are the 2 KEY OBJECTIVES of financial markets?

Answer 19

1. Provide access to investments that can combat inflation

2. Provide way for companies to raise money (other than borrowing from a bank).

Question 20

What is the objective of the stock market?

Answer 20

Facilitate trading of stocks & shares

Question 21

What is ‘stocks’ function?

Answer 21

Allows investors to lend money to a company in exchange for a fixed interest payment (Also known as bonds).

Question 22

What is the function of ‘shares’?

Answer 22

Allows investors to buy company shares & enjoy growth & profits via dividends.