Investment and commercial banks

Question 1

Gilts

Answer 1

Government bonds

Question 2

Shares vs bonds

Answer 2

Shares give someone part ownership of a company and dividends. Bonds are effectively a loan where the bond holder gets guaranteed interest and the nominal price of the bond after it matures.

Question 3

Advantages of a portfolio

Answer 3

Likely to spread risk and liquidity

Question 4

Central bank

Answer 4

-Only one central bank e.g. the bank of England
-Issues currency and their customers are governments and banks
-Aim=To oversee the country’s financial system and to implement monetary policy

Question 5

Commercial bank

Answer 5

-Retail bank used for savings, deposits and loans and customers are the general public
-Aim=Profit for owners

Question 6

Investment bank

Answer 6

-Financial advisory work and deals in financial markets
-Customers are private companies
-Aim=Profit for owners
-Banks like Barclays are banking groups and so have commercial and investment banks

Question 7

Who controls the banks?

Answer 7

-Commercial and investment banks are regulated by the PRA (Prudential Regulation Authority)-Part of the bank of England and the FCA (Financial Conduct Authority)
-Central banks are answerable to, but not controlled by, the Treasury

Question 8

Investment bank key features

Answer 8

-They deal with companies, financial institutions, the government and it agencies
-They trade shares, bonds and other financial products
-Their assets are larger than many countries GDP so they are said to be “too big to fail” so governments are forced to prop them up

Question 9

Risk

Answer 9

Retail banks are a safe activity and the profits to be made are relatively modest. Investment banks offer much higher potential profits but risks are greater.

Question 10

Ring fencing

Answer 10

Means separating the 2 sides of the business (investment and commercial bank) so that consumer savings are safe if investment bank fails.