Chapter 6 - financial institutions

Question 1

What is a bank?

Answer 1

A type of financial institution.

Question 2

What services do financial institutions provide?

Answer 2

1. A safe place to keep money.
2. To help people make payments.
3. Lending money.

Question 3

How do banks make a profit?

Answer 3

1. By making loans to people. Banks accept deposits and then make loans using this money. They make a profit on these loans by charging a higher rate of interest on their loans than the interest they pay to the depositors.
2. By charging fees for services like withdrawing money from an ATM.
3. By investing money into shares and potentially receiving capitsl gains and dividends.

Question 4

What are the types of bank accounts?

Answer 4

1. Cheque account/current account
2. Savings account
3. Term deposit

Question 5

What is a cheque account/current account?

Answer 5

Where money is readily available by writing a cheque. Can also be operated by using a debit card.

Question 6

What is a savings account?

Answer 6

A bank account which allows people to save money and earn interest.

Question 7

What is a term deposit?

Answer 7

Where money is saved for a set time called the term. It earns the highest rate of interest but if money is withdrawn early the interest is reduced.

Question 8

What are three types of loans?

Answer 8

1. Overdrafts
2. Personal loans
3. Mortgage

Question 9

What is an overdraft?

Answer 9

This allows a person to use more money than they have in their cheque account up to an agreed limit.

Question 10

What is the function of an overdraft?

Answer 10

To pay unexpected bills usually.

Question 11

What is a personal loan?

Answer 11

A loan for a set amount of time that is repaid plus interest by the end of the term.

Question 12

What is a mortgage?

Answer 12

A long term loan used by individuals and firms to buy property (land and buildings). The property is used to secure the loan so if the loan cannot be paid back the property will be sold to cover the debt.

Question 13

What are five methods of payment?

Answer 13

1. Cash
2. Cheques
3. Debit or eftpos card
4. Direct debit
5. Credit card

Question 14

How is using cash a method of payment?

Answer 14

Cash includes using notes and coins. Banks allow cash to be readily available through ATM’s (automatic telling machines).

Question 15

How is using cheques a method of payment?

Answer 15

Cheques are a written instruction to a back to pay a certain amount of money from your account to the account of the person you are paying. Cheques are not legal tender so may not always be accepted.

Question 16

How is using a debit or eftpos card a method of payment?

Answer 16

These are electronic methods of payment, if there are not enough funds in an account, then the transaction will be declined.

Question 17

How is using direct debit a method of payment?

Answer 17

Where your bank pays money on your behalf such as regular bills for a phone or electricity.

Question 18

How is using a credit card a method of payment?

Answer 18

This provides a short-term loan. The bank pays the money for you but you have to repay them. There is usually an interest free period of around one month.

Question 19

What are three types of banks?

Answer 19

1. Commercial banks
2. Savings banks
3. Investment or merchant banks

Question 20

What are commercial banks?

Answer 20

These types of banks operate for consumers and businesses. They usually have a number of branches and normally provide services like:

• accepting deposits
• providing loans
• helping with payments

Question 21

What are investment/merchant banks?

Answer 21

Banks that specialise in helping large businesses raise finance and provide investment banking services.

Question 22

What do finance companies do?

Answer 22

Usually specialise in hire purchase lending.

Question 23

What are building societies?

Answer 23

Specialise in lending for income ownership and other property.

Question 24

What are venture capitalists?

Answer 24

Specialise in providing finance for new and risky business ventures usually in return for some business ownership. This type of finance is called venture capital.

Question 25

What are unit trusts?

Answer 25

Professional advisors buy shares with saver’s money in a variety of companies.

Question 26

What is crowd-funding?

Answer 26

The use of usually small amounts of money from a large amount of people to finance a new business venture.

Question 27

What is a share market?

Answer 27

A market for the buying and selling of company shares and government stock. Shareholders can make a profit through capital gain and dividends.

Question 28

What are preference shares?

Answer 28

Preference shareholders receive their share of profits before any other type of shareholders.

Question 29

What are ordinary shares?

Answer 29

The most common type of shares in a limited company.

Question 30

What is government stock?

Answer 30

Central and local governments can issue shares (called stock) to raise finance to fund their activities.

Question 31

What is a bull market?

Answer 31

Where share prices are rising.

Question 32

What is a bear market?

Answer 32

Where share prices are falling.

Question 33

What is the central bank?

Answer 33

The bank at the centre of the banking system in an economy. It is the banker to the government and other banks. Its main role is to maintain the stability of a countries currency.

Question 34

What are the functions of a central bank?

Answer 34

1. To carry out a governments monetary policy in order to control inflation. This function is usually called price stability.
2. Issue notes and coins.
3. Supervise the banking system and register new banks.
4. Lender of last resort to prevent a bank going bankrupt.
5. Banker to the government, looks after its tax revenues and makes payments.
6. Manages the nations gold and foreign currency reserves.

Question 35

What are the functions of commercial banks?

Answer 35

1. Keeping money safe, money is more safe at a bank.
2. Lending, banks provide:
   - loans
   - mortgages
   - credit cards
   - overdrafts
3. Commercial banks provide a means of making payments.
4. Commercial banks provide foreign currency.