U1: T1 - INTRODUCING THE FINANCIAL SERVICES INDUSTRY

Question 1

How can a bank involved in wholesale banking raise money quickly in order to finance business activities?
a) By a further issue of shares.
b) By borrowing from the Bank of England.
c) By calling in their debts.
d) From the interbank market.

Answer 1

d) From the interbank market.

Question 2

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

Answer 2

1) Geographic location - lenders and borrowers are not necessarily able to find each other and deal directly with each other

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

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

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

Question 3

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

Answer 3

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 4

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 4

b) disintermediation

Question 5

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 5

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

Question 6

Which institution issues UK banknotes?
a) The Bank of England.
b) The Treasury.
c) The Royal Mint.

Answer 6

The Bank of England. The Royal Mint issues coins.

Question 7

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

Answer 7

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 8

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 8

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

Question 9

Who is responsible for administering Sonia?
a) The FCA
b) The Bank of England.
c) The Monetary Policy Committee.
d) The Prudential Regulation Authority.

Answer 9

The Bank of England is the administrator for Sonia.

The FCA used to regulate the Wholesale Markets Brokers’ Association as the calculation and publication agent. In April 2018, the Bank of England assumed calculation and publication duties.

Question 10

Define Retail Banks

Answer 10

Banks that provide payment services and savings and loans to personal customers or smaller businesses.

Question 11

Define Wholesale Banks

Answer 11

Banks that provide funding for other financial institutions or very large corporate clients.

Question 12

Define Life Assurance

Answer 12

Insurance that provides payment, generally as a lump sum but possibly as an income, on the death of the person covered by the policy. It is sometimes referred to as life insurance or life cover.

Question 13

Define General Insurance

Answer 13

Insurance designed to protect policyholders from the financial consequences of adverse life events. Examples include household insurance, motor insurance, travel insurance and commercial property insurance.

Question 14

What are the 7 functions of the Bank of England?

Answer 14

1. Issue of banknotes
2. Banker to the government
3. Banker to the banks
4. Advisor to the government
5. Foreign Exchange market
6. Lender of last resort
7. Maintaining Economic stability

Question 15

What is a Credit Union?

Answer 15

A credit union is a mutual organisation run for the benefit of their members. Credit unions can provide services to different groups of people, such as housing associations and employees of a national company, even if some of the tenants/employees live outside the geographical area that the credit union serves.

A unique feature of credit unions is that members’ savings and loan balances are covered by life assurance. This means that any loan balance will be paid off on death, and a lump sum equal to the savings held will also be paid, subject to overall limits.

Question 16

Which one of the following is not an example of a mutual organisation?

a) Bolton Building Society.
b) Savers Credit Union.
c) Foresters Friendly Society.
d) Eastern Bank.

Answer 16

d) Eastern Bank.

Question 17

Which organisation is responsible for managing new issues of UK gilts?

a) The Debt Management Office.
b) The London Stock Exchange.
c) The UK government.
d) The Bank of England.

Answer 17

a) The Debt Management Office.

Question 18

What is the maximum borrowing a building society can raise on the wholesale market?

a) 25% of their assets.
b) 50% of their liabilities.
c) 60% of their liabilities.
d) 75% of their assets.

Answer 18

b) 50% of their liabilities.

Question 19

Which of the following is not a function of the Bank of England?

a) Prudential regulation.
b) Issuing bank notes.
c) Supervising financial markets.
d) Banker to the UK government.

Answer 19

a) Prudential regulation.

Question 20

Where lenders and borrowers interact directly, it is known as:

a) intermediation.
b) disintermediation.
c) intermediation placement.
d) indirect intermediation.

Answer 20

b) disintermediation.

Question 21

In order to be acceptable as a medium of exchange, money must have certain properties. Which of the following is not one of the properties?

a) Divisible into smaller units.
b) Portability.
c) Sufficient quantity.
d) Available in high value denominations.

Answer 21

d) Available in high value denominations.

Question 22

The benchmark for financial businesses and institutions to calculate the interest paid on swap transactions and sterling floating rate notes is the:

a) sterling overnight index average.
b) Monetary Policy Committee rate.
c) Bank of England base rate.
d) London interbank offered rate.

Answer 22

a) sterling overnight index average.

Question 23

Finance houses raise most of their funds through:

a) private equity markets.
b) customer deposits.
c) wholesale markets
d) retail markets.

Answer 23

c) wholesale markets

Question 24

The Workers Credit Union has reserves of £60,000, which equals 6% of its assets. This means it:

a) can only pay dividends to savers.
b) can only pay interest to savers
c) can pay dividends or interest to savers.
d) cannot pay dividends or interest to savers.

Answer 24

c) can pay dividends or interest to savers.

Question 25

Which of the following is not one of the four elements of intermediation?

a) Maturity transformation.
b) Risk transformation.
c) Equalisation.
d) Aggregation.

Answer 25

c) Equalisation.

Question 26

When a building society converts to a bank it is called:

1) Disintermediation
2) Demutualisation

Answer 26

2) Demutualisation

Question 27

To join a credit union, members must:

1) Meet membership requirements
2) Pay entrance Fee
3) Buy at least one £1 share
4) Buy at least 1% share

Answer 27

1, 2 & 3

Question 28

All members of a credit union are treated equal, regardless of the size of their shareholding.

True or false?

Answer 28

True

Question 29

Which of the following 2 statements are correct?

Credit unions are:
1) Owner by members
2) Controlled by members
3) Owned by a voluntary board of directors
4) Controlled by a voluntary board of directors

Answer 29

1 & 4

Question 30

Credit unions are authorised and regulated by the FCA. True or false

Answer 30

True

Question 31

Credit Unions pay quarterly dividends typically of 4-5% annualised. True or false?

Answer 31

False.

Each credit union share pays an annual dividend, typically 2-3%

Question 32

Credit Unions can choose to pay interest but must show:
1) They have the necessary systems and controls in place and have at least £60,000 or 5% of total assets in reserve
2) They have the necessary systems and controls in place and have at least £50,000 or 5% of total assets in reserve

Answer 32

2) They have the necessary systems and controls in place and have at least £50,000 or 5% of total assets in reserve

Question 33

Credit Unions member savings are covered by life assurance.

True or false?

Answer 33

True.

This means that any loan balance will be paid off on death, and a lump sum equal to the savings held will also be paid, subject to overall limits.