Study Unit 1: The Business of Banking

Question 1

What are Investment Securities?

Answer 1

Negotiable Financial instruments that hold some kind of monetary value which can be issued by Government or an Entity.

Question 2

What can a bank be defined by? (3)

Answer 2

1. The economic functions it performs
2. The services it provides to consumers
3. The legal basis for it’s existence

Question 3

Bank Competitors: What are Savings Associations?

Answer 3

Specialize in selling savings deposits and granting home

mortgage loans and other forms of household credit to individuals and families.

Question 4

Bank Competitors: What are Credit Unions?

Answer 4

Collect deposits from and make loans to their members as nonprofit
associations of individuals sharing a common bond (such as the same employer)

Question 5

Bank Competitors: What are Fringe Banks?

Answer 5

Include payday lenders, pawn shops, and check-cashing outlets, offering
small loans bearing high risk and high interest rates to cover the immediate financial
needs of cash-short individuals and families

Question 6

Bank Competitors: What are Money Market Funds?

Answer 6

Collect liquid funds from individuals and institutions and invest
these monies in quality securities of short duration

Question 7

Bank Competitors: What are Mutual Funds (investment companies)?

Answer 7

Sell shares to the public representing an

interest in a professionally managed pool of stocks, bonds, and other securities

Question 8

Bank Competitors: What are Hedge Funds?

Answer 8

Sell shares in a pool of assets mainly to upscale investors that typically
include many different kinds of assets (including nontraditional investments in
commodities, real estate, loans to new and ailing companies, and other risky assets);

Question 9

Bank Competitors: What are Security Brokers and Dealers?

Answer 9

Buy and sell securities on behalf of their customers and for their own accounts

Question 10

Bank Competitors: What are Investment Banks?

Answer 10

Provide professional advice to corporations and governments, help clients raise funds in the financial marketplace, seek possible business acquisitions,
and trade securities.

Question 11

Bank Competitors: What are Finance Companies?

Answer 11

Offer loans to commercial enterprises (such as auto and appliance dealers) and to individuals and families using funds borrowed in the open market or from other financial institutions

Question 12

Bank Competitors: What are Financial holding companies (FHCs)?

Answer 12

Credit card companies, insurance and finance companies, and security broker/dealer firms operating under one corporate umbrella.

Question 13

Bank Competitors: What are Life and property/casualty insurance companies?

Answer 13

Protect against risks to persons or property and manage the pension plans of businesses and the retirement funds of individuals

Question 14

What is the role of the Financial System in society? (5)

Answer 14

1. Encourages Individuals and Institutions to save and transferring these funds to Individuals and Institutions that need funds for projects which helps economic growth.
2. Facilitates Payments Services
3. Risk Protection services
4. Liquidity Services
5. Credit Services

Question 15

What are Yields?

Answer 15

The earnings generated and realised on an investment over a period of time expressed as a % based on the invested amount, the current market value or face value of the security.

Question 16

How do you work out the yield on an investment?

Answer 16

It’s the Dividend Paid amount divided by the Share Price expressed a a %

Question 17

What value do intermediaries provide in the Financial System? (6)

Answer 17

1. Investing in large assets and splitting these into smaller amounts that everyone can invest in.
2. Acceptance of the Risks associated with loans to borrowers.
3. Providing Depositors with low risk securities
4. Liquidity - Intermediaries hold large sums of liquid funds that can be easily made available to households and businesses.
5. Superior Ability to evaluate investment information to provide clients with the best possible investment option.
6. Constant monitoring of the financial system and the impact of events that may affect the risks associated with borrowers and to reduce the risk to Depositors

Question 18

List the Old Services banks provided to clients (7)

Answer 18

1. Currency exchange
2. Discounting commercial notes from market lenders and making business loans
3. Offering Saving Deposits
4. Safekeeping valuables and Valuation Certifications
5. Supporting Government activities by buying government bonds
6. Cheque accounts for demand deposits
7. Trust Services - Property Management, Late Estate Management

Question 19

List the New Services banks provided to clients (11)

Answer 19

1. Consumer Loans
2. Financial Advising
3. Cash Management
4. Offering Equipment Leasing
5. Making venture capital loans
6. Selling insurance policies
7. Selling and Managing Retirement policies
8. Securities Brokerage and Investment Management
9. Mutual Funds, Annuities, Investment Products
10. Merchant Banking Services - Purchasing Large corporate stock to aid launching a new venture. The bank bears the risk of possible decline in share value
11. Risk Management and Hedging Services

Question 20

List the Trends affecting all Financial Service Firms (8)

Answer 20

1. Service Proliferation
2. Rising Competition
3. Government deregulation and re-regulation
4. Increasing client requirements in purchasing a mix of interest sensitive funds
5. Technology changes and automation requirements
6. Geographic expansion and consolidation
7. Convergence - Movement across industry lines to broaden it’s sales base
8. Globalisation - Large banks now span continents and have to deal with other large global competitors.