chapter 2 saving and borrowing

Question 1

what are the three main ways to link savers and borrowers?

Answer 1

• by the banks
• by equity
• by bonds

Question 2

how do banks link savers and borrowers?

Answer 2

• the savers deposit their surplus money at the bank, for which the bank is willing to pay interest
• the bank will then lend the deposited money on to borrowers, charging them interest on the loans

Question 3

what is equity?

Answer 3

shares or stock, and it represents ownership - the holders of the equity in a company own that company

Question 4

what is the relationship between risk and reward?

Answer 4

increasing risk, higher reward

Question 5

which is generally more risky, equities or bonds, and why?

Answer 5

equities:
- unlike bonds, equities do not specify a percentage return that will be paid each year and do not have a set date at which they are repaid
- when something goes wrong, equities are last in the queue when it comes to getting any money back

Question 6

how are equities different to bonds?

Answer 6

• equities give the holder an ownership stake in the issuing company, bonds do not
• equities have no set date of repayment, bonds typically have a set repayment date
• equities do not pay interest, bonds typically do pay a specified percentage interest each year

Question 7

what are dividends?

Answer 7

a share of a company’s profits that are paid by the company to the shareholders

Question 8

what is reinsurance?

Answer 8

allows the risk taken on by insurance companies to be shared