topic 6

Question 1

Annual equivalent rate (AER)

Answer 1

The interest that will be earned on the money in one year, taking into account how often the provider pays the interest (eg monthly or annually), the effect of compounding the interest and any fees and charges

Question 2

Annuity

Answer 2

A product where the customer pays a lump sum (the proceeds of a pension fund on retirement) and, in return, receives an agreed set annual amount for the rest of their life

Question 3

Catastrophe bonds

Answer 3

bonds purchased by investors who receive a good rate of interest as long as the catastrophe the bond covers does not happen. If it does occur, then they lose their capital and the insurance company does not have to pay them back what they invested; this helps the insurer to lessen its exposure to the disaster

Question 4

Catastrophic loss

Answer 4

A loss in excess of unexpected loss, which is unlikely but that could conceivably happen

Question 5

Cyberterrorism

Answer 5

A situation where terrorists deliberately attack computer networks by uploading viruses that cause links and files to malfunction and data to be deleted.

Question 6

Ethical investment

Answer 6

An investment made in a company that takes into account the wider impact of its activities on society and the environment

Question 7

Exogenous shocks

Answer 7

A significant event that happens without warning and that has large and lasting effects on political, economic, and social systems, eg the Coronavirus (Covid-19) pandemic

Question 8

Expected loss

Answer 8

the average amount of loss that someone could expect to face, eg loan defaults.

Question 9

Gross interest

Answer 9

interest paid without tax deducted

Question 10

ljara home purchase
plan

Answer 10

A form of Islamic home purchase plan. The provider buys the client’s selected property. The provider then sells the property to the client for the same price under a promise to purchase agreement, with repayment spread over a term of up to 25 years. The provider is the registered owner of the property during the repayment term. The client occupies the property under a lease during the payment term, paying a monthly amount that combines capital repayment and rent for the lease. The monthly payment is fixed for 12 months at a time and is
then reviewed to allow for adjustments to the rental element as appropriate; these adjustments will usually reflect changes in external interest rates.

Question 11

Index-linked

Answer 11

Rising in line with inflation

Question 12

Islamic home purchase plans

Answer 12

Methods of buying a home that are compliant with Sharia law, which forbids Muslims from paying or receiving interest. There are two main types: Ijara and Murabaha home purchase plans (see separate definitions)

Question 13

Loan to value (LTV)

Answer 13

the ratio of the size of the loan to the value of the property

Question 14

Money laundering

Answer 14

the process of making ‘dirty’ money (money gained from criminal activities) ‘clean’ – in other words making it look as though it has been acquired legitimately

Question 15

Money laundering officer

Answer 15

An employee of a financial provider who must be informed of suspicious activity in the business that might be linked to money laundering or terrorist financing, and if necessary report it

Question 16

Mortgage equity withdrawal

Answer 16

Additional borrowing based on the difference between the value of a house and the outstanding mortgage (ie if the house is valued at more than the amount the owner has to repay on the mortgage).

Question 17

Mortgage forbearance

Answer 17

When a lender does not seek to repossess a property as soon as the borrower misses a few monthly payments, instead allowing the customer to stop paying or make reduced payments for a set period

Question 18

Murabaha home
purchase plan

Answer 18

A form of Islamic home purchase plan. The provider buys the property at an agreed price and then sells it immediately to the client at a higher price. The exact price depends on the repayment term, which can be up to 15 years. The higher price charged to the purchaser
reflects the profit element for the provider. A first payment, typically of around 20 per cent of the property value, is usually required and the client will then make monthly fixed payments to the provider during
the term. As the property has been transferred to the client, the property is registered in their name rather than that of the provider.

Question 19

Negative real interest rate

Answer 19

Where the nominal interest rate is lower than the rate of inflation

Question 20

Nominal interest rate

Answer 20

The actual rate of interest received by a saver

Question 21

Pandemic

Answer 21

Where an infectious disease spreads rapidly to many people across a large region.

Question 22

Public sector

Answer 22

the collective name for organisations that are funded through general taxation, eg schools, healthcare, some welfare services

Question 23

Pure risk

Answer 23

Where risk can only have a downside, eg loss of or damage to possessions

Question 24

Real income

Answer 24

The value of people’s income in terms of goods and services, ie the purchasing power of the income or what people can buy with the income.

Question 25

Real interest rate

Answer 25

The difference between the nominal interest rate received by the saver and the rate of inflation

Question 26

Real terms

Answer 26

A value adjusted to account for changes in prices, eg real income or real interest rate. For example, although someone may receive a nominal pay increase of 5%, if inflation (ie rise in general prices) is 3% then in real terms the pay increase is approximately 5% – 3% = 2%

Question 27

Retail ring-fencing

Answer 27

Separating the deposit-taking part of a bank or building society from the rest of its business so that, in the event of financial difficulties, the ring-fenced deposits of retail customers cannot be used to pay the debts of the more risky investment section of the bank

Question 28

Sharia law

Answer 28

Rules that devout Muslims follow, which, in relation to personal finance, prohibit the paying and receiving of interest, which virtually excludes a strict Muslim from doing any borrowing

Question 29

Speculative risk

Answer 29

Where risk can have either a good or a bad outcome, eg a financial loss or a financial gain

Question 30

Unexpected loss

Answer 30

the amount by which the actual loss might exceed the expected loss.

Question 31

Volatility

Answer 31

Changeability, as when the value of an investment moves up and down significantly in a short period

Question 32

An exogenous shock is one that

Answer 32

occurs without warning and has a significant impact

Question 33

speculative risk has

Answer 33

either an upside or a downside

Question 34

Catastrophic loss is:

Answer 34

a loss in excess of an unexpected loss

Question 35

To experience a rise in real income, people’s wages must increase by more than the current:

Answer 35

rate of inflation

Question 36

If a saving account pays 1.5% interest AER and inflation is 2.5%, the real interest rate is

Answer 36

negative

Question 37

Which of the following annuities will pay out the lowest monthly income initially

Answer 37

an RPI-linked, guaranteed annuity

Question 38

How do expectations of higher inflation affect the demand for mortgage loans?

Answer 38

Demand is likely to increase

Question 39

Extending the term of a mortgage or suspending mortgage payments to help a home owner whose mortgage is in arrears is called:

Answer 39

mortgage forbearance

Question 40

Which body required RBS and Lloyds to undergo a divestment procedure in 2009

Answer 40

the EU Competition Commissioner

Question 41

Retail ring-fencing means that:

Answer 41

the retail activities of each UK bank are placed in a separate subsidiary from their investment activities

Question 42

insurance is a way of transferring risk.

Answer 42

true

Question 43

A Sharia-compliant bank can charge interest on the money it lends to customers.

Answer 43

false