Topic 1: Key Words

Question 1

Inflation

Answer 1

an increase in level of prices of goods and services

Question 2

Financial Intermediary

Answer 2

an entity that acts as the middle person between two parties in a financial transaction. E.g. banks, building society

Question 3

Intermediation

Answer 3

matching those with surplus cash and those with shortfall. The saver lends to the borrower via an intermediary.

Question 4

Intermediation profit margin

Answer 4

the intermediary borrows from the saver at one rate and lends the money to the borrower at a higher rate, the difference is their margin (profit)

Question 5

Disintermediation

Answer 5

those with a surplus and those with a deficit connect without the intermediary (middle person)

Question 6

Risk Management

Answer 6

identifying and monitoring risk to manage loss

Question 7

Product Sales Intermediaries

Answer 7

brings together the product provider and the potential customers who wish to purchase the providers product and services. E.g. financial adviser, mortgage adviser

Question 8

Surplus Party

Answer 8

cash rich, more liquid funds

Question 9

Deficit Party

Answer 9

cash poor, do not have sufficient funds to meet spending needs

Question 10

Liquidity

Answer 10

the ability to turn an asset into cash. Liquid assets are those that can be exchanged quickly or are already liquid. E.g. Cash. Liquid assets can take time to convert E.g. property, shares, company

Question 11

Retail Banks

Answer 11

provide payment services and saving loans to personal customers or smaller businesses

Question 12

Wholesale Banks

Answer 12

provide funding for other financial institutions or very large corporate clients

Question 13

Life assurance

Answer 13

insurance that provides payment on death of a person covered by the policy. E.g. life insurance or life cover

Question 14

General insurance

Answer 14

to protect policyholders from the financial consequences of adverse life events. E.g. home, motor, travel and commercial property insurance

Question 15

MPC Monetary Policy Committee

Answer 15

set interest rates to ensure inflation target is met

Question 16

Proprietary Organisations

Answer 16

majority of large financial institutions limited companies. Owned by shareholders who have the right to share distribution of the company’s profits in the form of dividends

Question 17

Mutual Organisations

Answer 17

not constituted as a company therefore no shareholders. Owned by it’s members, who determine how the company is managed

Question 18

Demutualisation

Answer 18

Building Society Act 1986, allows Building Societies to demutualise and convert to a bank

Question 19

Windfall

Answer 19

free shares members are entitled to following demualisation

Question 20

Carpetbagging

Answer 20

opening an account with a mutual organisation who are soon to convert to obtain shares. Restrictions in place to stop this

Question 21

Credit Unions

Answer 21

a mutual organisation run for the benefit of it’s members

Question 22

Ordinary Shares (Credit Union)

Answer 22

paid up and bring all benefits if credit union membership

Question 23

Deferred Shares (Credit Union)

Answer 23

payable in special circumstances e.g. death

Question 24

Interbank Market

Answer 24

a large market which recycles surplus cash held by banks, either directly between banks or through the services of specialist money brokers

Question 25

Wholesale Banking

Answer 25

involves providing funds to other financial institutions or very large corperate clients

Question 26

Retail Banking

Answer 26

involves providing funds to individuals and smaller businesses

Question 27

Sonia (sterling overnight index average)

Answer 27

reflects the average of the interest rates that banks pay to borrow sterling overnight from other investors and financial institutions. It is an important benchmark used by financial businesses and institutions to calculate the interest paid on swap transactions and sterling floating rate notes

Question 28

Libor (London Interbank Offered Rate)

Answer 28

rate of interest charged in the interbank market, a reference rate quoted a Libor plus a specified margin. Average calculated by information submitted by major banks regarding the interest rate they were paying to borrow from other banks

Question 29

Four elements of intermediation: Geographic Location

Answer 29

the physical problem that individual lenders and borrowers would have to locate each other and would probably be restricted to their own area of circle of contacts

Question 30

Four elements of intermediation: Aggregation

Answer 30

the lender might not have enough money available to satisfy the borrowers requirements

Question 31

Four elements of intermediation: Maturity Transformation

Answer 31

the borrower may need the funds for a longer period than the lender is willing to part with

Question 32

Four elements of intermediation: Risk Transformation

Answer 32

individual depositors are generally reluctant to end all their savings to another individual or company, mainly because of the risk of default or fraud