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ethics and integrity in financial services Flashcards

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1
Q

definition of integrity

A

being honest and acting with strong and moral principles

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2
Q

definition of ethics

A

doing the morally correct and incorrect actions that society typically thinks is “right”

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3
Q

why is it important for business to be ethical and have integrity?

A
  • trust leads to confidence
  • bad reputation can be costly
  • lack of trust leads to higher transactional costs
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4
Q

definition of law

A

is about what is lawful (legal) and unlawful (illegal)

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5
Q

what is an ethical decision?

A

one that is both legal and meets the shared ethical standards of the community

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6
Q

CISI code of conduct

A

Honesty
Openness
Transparency
Fairness

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7
Q

What is the risk return trade off?

A

Investors need to consider the risk over the reward before deciding to buy or sell investments

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8
Q

What happens when an investor takes a high risk?

A

They have a higher potential reward .

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9
Q

What happens when a lender takes a higher risk?

A

A higher rate of interest will be charged

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10
Q

What are equities also known as

A

Stocks
Shares

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11
Q

What are equities?

A

Equities are shares of ownership issued by publicly-traded companies and traded on global stock exchanges

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12
Q

How do shareholders make returns with equity?

A

Through dividends and capital gains

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13
Q

Example of bonds?

A

Debt instruments
Loan stocks

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14
Q

What are bonds?

A

A loan made by an investor to a company or government

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15
Q

What do bondholders do?

A

make returns through interest paid on the bond (known as a coupon). They can also be traded

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16
Q

What is an arranged overdraft?

A

When the bank lets you become overdrawn and has a fixed interest

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17
Q

Features of an overdraft?

A
  • able to spend more money than you have in your account
  • no set date for repayment
  • interest rate can be changed at any time
  • high interest rate as it is short term only
  • may have to pay a one off or annual arrangement fee
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18
Q

what is a bank loan

A

a borrower receives a certain amount from a lender (a bank). the borrower agrees to pay a contracted rate of interest to the lender and agrees a repayment date

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19
Q

a loan is normally for:

A
  • set period, generally less than five years
  • a set rate of interest
  • with a defined repayment schedule
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20
Q

what is an unsecured loan?

A

a loan provided to a borrower where the lender takes no security

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21
Q

what is a secured loan?

A

situation where a lender takes something of value (asset) as security for a loan

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22
Q

what is a mortgage?

A

long term loan used to finance the purchase of real estate. the money lent by the bank is secured against the value of the property. lender can take back property, if payments aren’t made

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23
Q

features of mortgages:

A
  • set period (25-35 years)
  • fixed or variable rate of interest
  • defined repayment schedule
  • secured on the property the loan is used to buy
  • cheapest form of borrowing
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24
Q

overdrafts

A

borrowing from a bank where the lending bank can demand repayment at any time. account holder can with draw money from the account when they have a 0 balance

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25
Q

bank overdraft features:

A
  • flexible - able to be drawn, repaid, drawn again up to the overdraft limit
  • variable rate of interest
  • arrangement fee
  • unsecured and repayable on demand
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26
Q

problems with unauthorized overdrafts

A

they can be very expensive

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27
Q

how do pay day loans work?

A

money is paid directly into your bank account, and you repay with interest and charges at the end of the month

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28
Q

what are pay day loans meant for?

A

temporary financial problems

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29
Q

advantages of borrowers with a pay day loan

A
  • easy to access
  • fewer requirements than other loans
  • 14 day cooling off period
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30
Q

disadvantages of borrowers with a pay day loan

A
  • expensive to pay off, as you are paying more back
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31
Q

what changes were made to UK laws to regulate and control payday loans

A
  • A price cap on high cost short-term credit
  • Limits on how many times a payday loan could roll over
  • Stronger guidance on affordability checks and financial health warnings
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32
Q

Features of a retail bank

A
  • individuals are retail customers
  • banks that provide these customers with services are known as retail banks
    X the purpose is to attract deposits from savers and lend to borrowers
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33
Q

features of a commercial bank

A
  • in the us it encompasses banks who attract in gaining a deposit and giving out loans
  • ” commercial bank” in some countries who provide services to businesses (aka corporate banking)
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34
Q

how do credit cards work?

A

offers a person a line of credit that can be used to make purchases, balance, transfers cash advance, requiring theta you pay back the loan amount in the future, from banks

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35
Q

advantages of credit cards for borrowers

A
  • credit score
  • flexible
  • expense tracking
  • cheap currency conversion
  • prepared for emergencies
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36
Q

disadvantages of credit cards for borrowers

A
  • credit card fees
  • easy to overuse
  • high interest charges
  • can harm your credit score
  • variable interest rate
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37
Q

possible problems with credit cards

A

repayment of at least a minimum amount are required monthly

38
Q

how do pawnbrokers work?

A

let you borrow money in exchange for your valuables. you’ll be able to get the item back if you repay the loan and interest on time, otherwise it’ll be sold

39
Q

advantages of pawn brokers for a borrower

A
  • gain money quick and easily
  • credit score is not checked
40
Q

disadvantages of pawn brokers for a borrower

A
  • have high interest rates
  • will not lend the full value of the item, so you wont get the full value for the item
41
Q

what is interest?

A

cost of borrowing
reward for saving

42
Q

repaying a loan equation

A

capital + interest
normally expressed as a percentage

43
Q

features of quoted rate of interest

A
  • shows the cost of borrowing if interest is charged on an annual basis
  • normally the interest rate lenders advertise to customers
  • by law, lenders have to show this rate to customers
  • consumers can easily compare financial products
44
Q

features of effective annual rate (EAR)

A
  • takes the quoted/ advertised rate and adjusts it to take into account the frequency of interest
  • often, interest isn’t charged yearly but on a quarterly/ monthly basis
  • EAR is higher than quoted rate
45
Q

how to work out the EAR

A
  1. quoted rate/ frequency interest is charged
  2. turn interest into decimal /100
  3. add 1 to the decimal
  4. multiply the no. by the times interest is charged
  5. minus 1 to the decimal
    6 turn back into a % x100
46
Q

what do investment banks do?

A
  • capital raising
  • advise business wanting to borrow money in bond markets(debts)
  • advise business when issuing shares (equity)
  • advise businesses on strategy & growth (mergers/ acquisitions)
  • buy/ sell financial assets to make a profit
47
Q

what do retail banks do?

A
  • gives credit cards
  • personal loans for customers
  • currency exchange
  • mortgage lending
  • provides savings and current accounts for individuals
  • arranges overdrafts for customers
48
Q

what do central banks do?

A
  • issue notes and coins
  • acts as a banker to the banking system
  • regulates domestic banking
  • holds nations gold and money supply
  • sets official short term rate of interest(base/ bank rate)
  • manages national debt
  • controls money supply
49
Q

what is monetary policy

A

adjusting interest rates (to control inflation) and the money supply to manage fluctuations in economic activity

50
Q

what is fiscal policy

A

the use of government spending and tax policies to influence economic conditions

51
Q

what is the overall role of the MPC

A

monitor developments in the economy to monitor the inflation targets

52
Q

what is the overall role of the FPC

A

asses the risks facing the financial system

53
Q

target inflation rate?

A

2%

54
Q

how often does the MPC meet

A

every 3 months

55
Q

what is initial public offering (IPO)?

A

the first time shares are offered to members of the public via a stock exchange. the business becomes a PLC.
shares = equities

56
Q

who are shares in IPO initially sold to?

A

institutional investors e.g. pensions, as well as a smaller proportion to the public

57
Q

primary market for shares

A

existing company that is looking to expand. company sells shares to investors for the first time

58
Q

secondary market for shares (referred to as dealing)

A

company that’s listed -> investors may wish to dispose of some or all their shares adn will do this through the stock exchange trading system

59
Q

benefits of IPO’s

A

-raising capital by selling shares
- increasing public profile
- after the iPo its easier to buy and sell shares as they are being traded on the stock exchange. so shares have become liquid

60
Q

drawbacks of IPO

A
  • responsibility to shareholders which can cause conflicts
  • original owners lose outright control of the business
  • opens up the company to a takeover
  • greater scrutiny and levels of regulations to abide by
61
Q

what are capital gains?

A

equivalent of making a profit when selling shares have increased in value

62
Q

drawbacks of capital gains

A
  • share prices can be volatile so may not make any cash
  • unrealized shares aren’t sold adn capital gains aren’t cashed
  • capital gains tax ,
63
Q

what are dividends

A

on going income that a shareholder may receive as a reward for being a shareholder in a listed company

64
Q

drawbacks of dividends

A

income tax 7.5% base rate, 32.5% higher rate
not always paid back
-if a company is new
-mature company may reinvest profits
-expense of issuing new shares to raise capitals
-poor financial performance

65
Q

dividend yield equation

A

total dividends/market capitalization (total value of firms shares) x 100

dividend per share/share price x1 00

66
Q

AGM (annual general meetings):

A
  • once a year
    -give shareholders an opportunity to find out the firms performance and make decisions on its future
  • executives can be questioned
  • decisions are voted upon and the majority wins
67
Q

what’s the differences between an ordinary resolution and a special one?

A

ordinary - 51% to pass
special - 75% to pass

68
Q

what are shareholders rights?

A
  • to attend company meetings
  • to vote at meetings
  • “pre-emptive” right to buy or receive new shares offered by the company
69
Q

risks that shareholders face?

A
  • price risk, share prices may fall
  • liquidity risk- difficulty selling shares
  • issuer risk, share may become worthless
  • foreign exchange risk
70
Q

What is a bond

A

A debt instrument where by an investor lends money to an entity that borrows the funds for a defined period of time at a fixed interest rate

71
Q

Who issues bonds

A

By government and corporations when they want to raise money
Government = government bonds
Companies = corporate bonds

72
Q

Why are bonds issued

A

For the issuer to raise finance perhaps to fund something in particular

73
Q

Definition of green bonds

A

Bonds issued that fund activities that are environmentally responsible

74
Q

Definition of blue bonds

A

Bonds issued that fund activities that conserve oceans

75
Q

What are corporate bonds

A

Bonds issued by companies

76
Q

What is a federal budget

A

Expected income and expenditure of the US for a period of time

77
Q

What is a face/nominal value

A

Amount that is owed by the bond issuer and will be repaid on the repayment date

78
Q

What is the redemption/maturity date

A

The repayment date fro the bond

79
Q

Definition of a coupon?

A

Interest rate that’s applied to the nominal value

80
Q

What are gilts

A

Uk government bonds, they are known as this as the first certificates had a gold edge

81
Q

Why do the uk and us governments issue bonds

A

When total receipts (taxes) are less than total expenditure

82
Q

Definition of stock name

A

Name of the bond thats set by the issuer

83
Q

What factors does the repayment date depend on?

A
  • financial plans of the company
  • periods when investors want to invest
84
Q

Bond features:

A
  • repayment date
  • trade able
  • interest rate and frequency
85
Q

Whats yield another word for

A

Return

86
Q

Relationship between bond and yield prices

A

Inverse relationship between yield and bond prices

87
Q

Advantages of bonds

A
  • fixed date and amount to be repaid at redemption
  • Predictable income in the form of regular, fixed coupons
88
Q

Disadvantage of bonds

A
  • actual default - the failure of the issuer to be able to pay the coupons and/or the redemption amount
  • an increased risk of default resulting in the fall in the bonds value
89
Q

Credit rating agencies

A

Looks at bond issuers and assess the credit risk

90
Q

Whats a companies two choices to raise finance?

A
  • raise money by borrowing
  • raise money by selling more equity
91
Q

What is leverage

A

Leverages is the proportion of debt finance compared to equity finance in the company

92
Q

What is financial leverage in a business

A

Proportion of debt relative to the equity within a business

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