Topic 1

Question 1

What is the function for medium of exchange?

Answer 1

facilitates a transaction through a universal exchange accepted by all instead of bartering leaving grey areas and unknowns.

Question 2

Give an example of medium of exchange.

Answer 2

using cash or card instead of finding a coffee seller who would be willing to trade with the items you have.

Question 3

What is the function for unit of account?

Answer 3

It gives people perspective on the value of items so that they are comparable and grants a framework for pricing.

Question 4

Give an example of unit of account.

Answer 4

If the price for bread was £1 and price for eggs is £2 then we can easily see the value for eggs is double the value of bread.

Question 5

What is the function of store of value?

Answer 5

Money can be saved and retrieved at a later date allowing an individual to be delay consumption therefore it must hold its value.

Question 6

Give an example of store of value.

Answer 6

if an individual earns £50 today then that individual can save it to buy groceries at a later date provided inflation is not high.

Question 7

What does sufficient quantity mean?

Answer 7

Sufficient quantity is a property of money as the amount of money needed in day to day transactions and for the economy to function must be enough.

Question 8

What does general acceptability mean?

Answer 8

General acceptability is when a money is widely accepted by the majority of traders/businesses therefore it is trusted e.g. the British pound is accepted by most if not all businesses in the uk.

Question 8

What does divisibility mean?

Answer 8

Divisibility is when the money can be easily divided into smaller units for smaller transactions such as a £5 note can be broken down into every possible transaction such as £1.78.

Question 9

What does portability mean?

Answer 9

Money can be easily transported either in cash or digitally such as bank accounts which allow for quicker transactions.

Question 10

What does channelling surplus funds mean?

Answer 10

This is when a bank will take an individual/ savers funds and redistribute it back into the economy by lending to borrowers usually for a profit.

Question 11

What is profit motive?

Answer 11

This is when financial institutions will try to generate profits for their shareholders by providing a service which they can charge a fee for such as interest, account maintenance ect.

Question 12

What is an alternative objection?

Answer 12

Some financial institutions will prioritise non profit or not profit maximising objectives as they have other motives such as a credit union which will prioritise favourable interest rates and community support.

Question 13

What is meant by convenience when talking about the benefits of financial institutions?

Answer 13

Financial transactions are simplified by using current accounts as they make the transfer of money simple instead of handling cash.

Question 13

What is meant by achieving difficult objectives when talking about the benefits of financial institutions?

Answer 13

This is when financial objectives for an individual can be made to be easier due to the products provided by the financial institutions such as a mortgage for a young couple as the monthly payment is much more achievable.

Question 13

What is meant by protection from risk when talking about the benefits of financial institutions?

Answer 13

Insurance products can help individuals with financial risk when coming to significant life events such as medical bills or protperty loss.

Question 13

What is the definition of intermediation?

Answer 13

Intermediation is the process in which financial institutions use to facilitate the flow of funds between a surplus party and a deficit party ( a surplus party is a someone with excess funds and a deficit party is those in need of funds).

Question 14

What do we mean by borrowing and lending when it comes to the role of financial intermediaries?

Answer 14

Financial intermediaries such as banks for credit unions will collect deposits and then lend them out for a profit for example a bank may offer a savings account with 1% interest while they will offer a loan for 5% interest accumulating a 4% profit.

Question 14

What do we mean by liquidity provision when it comes to the role of financial intermediaries?

Answer 14

The financial intermediaries will allow liquidity in the market by allowing depositors to access their funds even if they have lent out the majority of their funds allowing for economic stability.

Question 14

What do we mean by information asymmetry when it comes to the role of financial intermediaries?

Answer 14

The financial intermediaries will allow the informational asymmetry to be reduced by giving indicators such as credit therefore the risk of lending to borrowers is reduced and there is trust built between the borrower and the lender.

Question 15

Name the challenge and the solution for geographic location as an element of intermediation.

Answer 15

Challenge: a borrower and a lender may not be positioned geographically well for example a farmer in need of a loan may not know anyone locally to provide this loan

Solution: the solution found by financial intermediaries is the access to a online or physical bank which can branch the borrower and the lender so both are provided for.

Question 16

Name the challenge and the solution for Aggregation as an element of intermediation.

Answer 16

challange: indivindual lenders my not have the funds nor trust their borrowers enough to lend out larger amounts to small businesses or even larger corporations

solution: financial intermediaries will pool together smaller accounts from savers to lend out to the businesses/borrowers so that the risk is spread and it is much simpler to raise the funds

Question 17

Name the challenge and the solution for maturity transformation as an element of intermediation.

Answer 17

challange: Borrowers will often want to borrow for long periods of time whereas the lender will mostly only want to lend for shorter periods of time.

solution: the financial intermediaries will set up fixed term deposits or saving accounts with a good long term interest to encourage the lender to hold the money in the account for as long as possible.

Question 18

Name the challenge and the solution for risk transformation as an element of intermediation.

Answer 18

Challenge: lenders will be hesitant to lend out to borrowers for reasons such as the fear of not being paid back.

Solution: A financial intermediary will spread the loans given over multiple institutions as well as many borrowers therefore if one defaults the impact is not as great as if it was one lender.

Question 18

Define risk management

Answer 18

Risk management is the assessment financial intermediaries will go through to help identify whom is worthy of loans and measure the risk of default.

Question 19

What is credit risk as a method of risk management.

Answer 19

Credit risk is the use of tools such as credit scores and historical repayments to determine wether a candidate is a risk of default or not.

Question 19

What is diversification as a method of risk management.

Answer 19

Diversification is when a financial intermediary will spread its loan portfolio across many business/individuals so it will reduce the impact of a loan default.

Question 20

What is loan loss reserve as a method of risk management.

Answer 20

Loan loss reserve is when a financial intermediary will set aside a portion of their earnings to cover a potential loss/ default of loans for example a ban will set aside 2% of all loans to cover potential losses.

Question 21

What is insurance products as a method of risk management.

Answer 21

Insurance products is when an intermediary will offer insurance of mortgages in case of defaults of repayments.

Question 22

Define product sales intermediaries.

Answer 22

A product sales intermediary acts as a bridge between the consumer and the financial intermediaries such as banks, insurance companies and investment firms.

Question 23

what is a financial advisor as a type of product sales intermediaries.

Answer 23

A financial advisors are professionals whom will grant advice to individual regarding investments and retirement plans, some advisors will take commission or charge a fee.

Question 24

What is a Mortgage advisors as a type of product sales intermediaries.

Answer 24

A mortgage advisors is an individual which will assist buyers through navigating the mortgage market and securing the best rates for their clients. they may work with multiple to secure a favourable terms for their clients.

Question 24

What is a insurance broker as a type of product sales intermediaries.

Answer 24

A insurance broker is an individual whom will help assist businesses or individuals help compare insurances to their specific needs and will help get the best coverage and rates.

Question 25

Define LIBOR ( London interbank offered rate)

Answer 25

This is the rate at which major banks around the world will lend to each other at, it gets published everyday and is referenced for a lot of financial products.

Question 26

What is the usage of LIBOR.

Answer 26

The LIBOR is used for many things such as loans,derivatives and financial contracts for example a mortgage that is on a variable interest could be tied to LIBOR plus a certain percentage.

Question 27

What are the issues with LIBOR.

Answer 27

LIBOR has been under scrutiny as it can be manipulated therefore the number of underpinning of LIBOR has declined making it less reliable.

Question 28

Define SONIA (sterling overnight index average)

Answer 28

SONIA reflects the interest rate at which banks are willing to lend to one another overnight as it is the benchmark for unsecured overnight transactions.

Question 29

What is the advantages to SONIA.

Answer 29

As a reflection of the actual transactions which occur in the market, SONIA is more reliable than LIBOR as it cannot be manipulated as easily.

Question 30

What is the use of SONIA.

Answer 30

It is constantly being used as a replacement for LIBOR as it is much more reliable.

Question 31

What is Retail Banking.

Answer 31

Retail banking is a financial service which is provided directly to its consumers and offers a large amount of face to face interactions as well as online, they offer checking and savings accounts to the consumer along with loans and mortgages. Examples would be HSBC, Lloyds and Natwest.

Question 32

What is wholesale banking.

Answer 32

Wholesale banking caters to larger financial corporations which handles greater risk transactions such as investment banking, large scale loans and treasuries. this type of banking often deals with large amounts of finances examples of these banks would be JP Morgan Chase and citigroup.

Question 33

Define a credit union.

Answer 33

Credit unions are financial institutions which are similar to retail banks however they have a focus on the consumer. The memberships to these institutions are belonging to communties such as an employee or a resident. They would traditionally offer lower rates than banks as they are a non profit organisation for example the co-operative bank.

Question 34

What is a ownership structure as a proprietary organisation.

Answer 34

This is when a shareholders own the company and invest capital in return for dividends based on the profitability.

Question 35

What is a Decision making as a proprietary organisation.

Answer 35

Shareholders of the business will have annual meeting on key decision in the business having an influence.

Question 36

What is a profit motive as a proprietary organisation.

Answer 36

The primary goal of profit motive is to maximise the profits through competitive pricing, which can lead to prioritising shareholders over consumers.

Question 37

What is a Governance as a mutual organisation.

Answer 37

This is when the a board of directors is appointed by the members as they have voting rights in the organisation.

Question 38

What is a ownership structure as a mutual organisation.

Answer 38

There are no external shareholders in the organisation therefore it is owned by its members who can be depositors/borrowers or policyholders.

Question 39

What is a Member centric approach as a mutual organisation.

Answer 39

this is when the members are highly prioritised which leads to favourable terms and lower fees.

Question 40

what is the Bank of England’s role

Answer 40

The bank serves as the central bank for England which is responcible for financial stability, regulating monetary policy and overseeing the financial system.

Question 41

what is the functions of The Bank of England

Answer 41

there are major functions for the bank of England as it is a sole provider of currency to England as well as being the banker to the government and other banks as it will help to provide liquidity and funds. The baks will also be an advisor to the government when it comes to monetary policies to set inflation targets and also provide funds in emergencies to maintain confidence in the system. finally the bank will also work alongside the PRA FCA to help regulate financial stability.