Intro financial Services Industry

Question 1

Money is -

a medium of exchange - can be used to exchange for goods and services.

A unit of account - a common denominator against which the value of goods and services can be measured.

A store of value - money received as payment today can be stored until required.

Which of these functions enables a person to work out that they can rent four DVD’s for the price of buying one?

Answer 1

A unit if account - allows the price of one item to be compared woth the price of another.

Question 2

How can a bank involved in wholesale banking raise money quickly in order to finance business activities?

A) by a further issue of shares.

B) by borrowing from the bank of England.

C) by calling in their debts.

D) from the interbank market.

Answer 2

D) from the internet market.

B) is incorrect because the Bank of England only lends to banks in its capacity as a lender of last resort. Does not lend to finance normal business activity.

Question 3

What are the four main reasons why individuals and companies need financial intermediation?

Answer 3

1. Geographic location - lenders and borrowers are not necessarily able to find each other and deal directly with each other.
2. Aggregation - an individual lender might not have enough funds to fulfil the borrowers requirements.
3. Maturity transformation - the borrower might need funds for longer than the lender is prepared to lend.
4. Risk transformation - the lender might be reluctant to lend all their funds to one borrower, in case that borrower is unable to repay.

Question 4

What is the key difference between a mutual organisation and a proprietary organisation?

Answer 4

A mutual organisation is owned by its members - in the case of a building society, these are savers and borrowers, for a life assurance company its the policy holders.

A proprietary organisation is owned by its shareholders and is a limited company.

Question 5

A financial transaction that is carried out directly between an organisation with surplus funds to lend and one that needs to borrow is an example of -

A) Demutualisation

B) disintermediation

Answer 5

B) disintermediation

Question 6

Which one of the following is not a role of the bank of England?

A) to regulate the supply of money and manage gold reserves

B) to act as financial ombudsman in resolving customer complaints about banks

C) to act as advisor to the government

D) to set interest rates

Answer 6

B) to act as financial ombudsman in resolving customer complaints about banks

Question 7

Which institution issues UK bank notes?

A) the bank of England

B) the Treasury

C) the Royal mint

Answer 7

A) the bank of England

The Royal mint issues coins.

Question 8

Credit unions cannot pay interest on savings. True or false?

Answer 8

False

Credit unions can pay interest on savings as long as they have the necesarry systems and controls in place and have at least £50,000 or 5 percent of total assets in reserve (whichever is greater)

Question 9

Freshfood ltd supplies fruit and veg to market traders and small shops. The banking transactions it carries out are an example of -

A) wholesale banking

B) retail banking

Answer 9

B) retail banking

Question 10

The setting of Libor is a regulated activity. True or false?

Answer 10

True

The London Inter-Bank Offered Rate is an interest-rate average calculated from estimates submitted by the leading banks in London. Each bank estimates what it would be charged were it to borrow from other banks. The resulting average rate is usually abbreviated to Libor or LIBOR