topic 6 Flashcards
Annual equivalent rate (AER)
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
Annuity
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
Catastrophe bonds
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
Catastrophic loss
A loss in excess of unexpected loss, which is unlikely but that could conceivably happen
Cyberterrorism
A situation where terrorists deliberately attack computer networks by uploading viruses that cause links and files to malfunction and data to be deleted.
Ethical investment
An investment made in a company that takes into account the wider impact of its activities on society and the environment
Exogenous shocks
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
Expected loss
the average amount of loss that someone could expect to face, eg loan defaults.
Gross interest
interest paid without tax deducted
ljara home purchase
plan
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.
Index-linked
Rising in line with inflation
Islamic home purchase plans
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)
Loan to value (LTV)
the ratio of the size of the loan to the value of the property
Money laundering
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
Money laundering officer
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
Mortgage equity withdrawal
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).
Mortgage forbearance
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
Murabaha home
purchase plan
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.
Negative real interest rate
Where the nominal interest rate is lower than the rate of inflation
Nominal interest rate
The actual rate of interest received by a saver
Pandemic
Where an infectious disease spreads rapidly to many people across a large region.
Public sector
the collective name for organisations that are funded through general taxation, eg schools, healthcare, some welfare services
Pure risk
Where risk can only have a downside, eg loss of or damage to possessions
Real income
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.
Real interest rate
The difference between the nominal interest rate received by the saver and the rate of inflation
Real terms
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%
Retail ring-fencing
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
Sharia law
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
Speculative risk
Where risk can have either a good or a bad outcome, eg a financial loss or a financial gain
Unexpected loss
the amount by which the actual loss might exceed the expected loss.
Volatility
Changeability, as when the value of an investment moves up and down significantly in a short period
An exogenous shock is one that
occurs without warning and has a significant impact
speculative risk has
either an upside or a downside
Catastrophic loss is:
a loss in excess of an unexpected loss
To experience a rise in real income, people’s wages must increase by more than the current:
rate of inflation
If a saving account pays 1.5% interest AER and inflation is 2.5%, the real interest rate is
negative
Which of the following annuities will pay out the lowest monthly income initially
an RPI-linked, guaranteed annuity
How do expectations of higher inflation affect the demand for mortgage loans?
Demand is likely to increase
Extending the term of a mortgage or suspending mortgage payments to help a home owner whose mortgage is in arrears is called:
mortgage forbearance
Which body required RBS and Lloyds to undergo a divestment procedure in 2009
the EU Competition Commissioner
Retail ring-fencing means that:
the retail activities of each UK bank are placed in a separate subsidiary from their investment activities
insurance is a way of transferring risk.
true
A Sharia-compliant bank can charge interest on the money it lends to customers.
false
