Topic 1: Introducing the Financial Industry

Question 1

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

Answer 1

Geographic location – lenders and borrowers are not necessarily able to find each other and deal directly with each other.

Aggregation – an individual lender might not have enough funds to fulfil a borrower’s requirements.

Maturity transformation – the borrower might need funds for longer than the lender is prepared to lend.

Risk transformation – the lender might be reluctant to lend all their funds to one borrower, in case that borrower is unable to repay.

Question 2

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

Answer 2

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 they are the policyholders. A proprietary organisation is owned by its shareholders and is a limited company.

Question 3

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 3

Disintermediation.

Question 4

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 adviser to the government.
d) To set interest rates.

Answer 4

b) To act as financial ombudsman in resolving customer complaints about
banks.

Question 5

Which institution issues UK banknotes?

a) The Bank of England.
b) The Treasury.
c) The Royal Mint.

Answer 5

a) The Bank of England. The Royal Mint issues coins.

Question 6

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

Answer 6

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

Question 7

Freshfood Ltd supplies fruit and vegetables to market traders and small shops. The banking transactions it carries out are an
example of:
a) wholesale banking.
b) retail banking.

Answer 7

b) Retail banking. Wholesale banking involves providing funds to other financial institutions or very large corporate clients.

Question 8

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

Answer 8

True