Unit 1: Introduction to the Financial Services Environment and Products - Topic 1 - Introducing the financial services industry

Question 1

What are the 4 main properties money must have to be a medium of exchange?

Answer 1

„ 1) sufficient in quantity
„ 2) generally acceptable to all parties in all transactions
„ 3) divisible into small units
„ 4) portable

Question 2

What is inflation?

Answer 2

A sustained increase in the general level of prices of goods and services.

Question 3

What are the 3 main elements of money?

Answer 3

„ 1) a medium of exchange – it can be exchanged for goods and services;
„ 2) a unit of account – a common denominator against which the value of goods and services can be measured; and
„ 3) a store of value – money received as payment today can be stored until required.

Question 4

What is a financial intermediary?

Answer 4

An institution that borrows money from the surplus sector of the economy and lends it to the deficit sector.

Question 5

What is DISINTERMEDIATION?

Answer 5

Involves lenders and borrowers interacting directly rather than through an intermediary. - eg Crowdfunding

Question 6

What are the four elements of intermediation?

Answer 6

1) Geographic location
2) Aggregation
3) Maturity transformation
4) Risk transformation

Question 7

What’s the definition of insurance?

Answer 7

‘a means of shifting the burden of risk by pooling to minimise financial loss’

Question 8

Give 3 examples of ‘Product sales’ intermediaries

Answer 8

1) financial advisers
2) insurance brokers
3) mortgage advisers

Question 9

What are the 7 main functions of the Bank of England?

Answer 9

1) Issuer of banknotes
2) Banker to the government
3) Banker to the banks
4) Adviser to the government
5) Foreign exchange market
6) Lender of last resort
7) Maintaining economic stability

Question 10

What are Gilt‐edged securities or “Gilts”?

Answer 10

They are loans to the Government

Question 11

The Financial Services Act 2012, effective from 1 April 2013, divided responsibility for financial stability between the Treasury, the Bank of England and what two new regulators?

Answer 11

Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)

Question 12

What is DEMUTUALISATION?

Answer 12

The conversion of the building society to a company.

Question 13

What does Libor stand for?

Answer 13

London interbank offered rate

Question 14

What is Libor?

Answer 14

The average rate of interest charged in the interbank market

Question 15

What is Libor being replaced by in 2021?

Answer 15

Libor is to be replaced by SONIA (the Sterling Overnight Index Average) as the primary interest rate benchmark in sterling markets from 2021.

Question 16

Which institution issues UK banknotes?

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

Answer 16

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

Question 17

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

Answer 17

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 18

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 18

Disintermediation.

Question 19

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

Answer 19

True