ethics and integrity in financial services Flashcards
(92 cards)
1
Q
definition of integrity
A
being honest and acting with strong and moral principles
2
Q
definition of ethics
A
doing the morally correct and incorrect actions that society typically thinks is “right”
3
Q
why is it important for business to be ethical and have integrity?
A
- trust leads to confidence
- bad reputation can be costly
- lack of trust leads to higher transactional costs
4
Q
definition of law
A
is about what is lawful (legal) and unlawful (illegal)
5
Q
what is an ethical decision?
A
one that is both legal and meets the shared ethical standards of the community
6
Q
CISI code of conduct
A
Honesty
Openness
Transparency
Fairness
7
Q
What is the risk return trade off?
A
Investors need to consider the risk over the reward before deciding to buy or sell investments
8
Q
What happens when an investor takes a high risk?
A
They have a higher potential reward .
9
Q
What happens when a lender takes a higher risk?
A
A higher rate of interest will be charged
10
Q
What are equities also known as
A
Stocks
Shares
11
Q
What are equities?
A
Equities are shares of ownership issued by publicly-traded companies and traded on global stock exchanges
12
Q
How do shareholders make returns with equity?
A
Through dividends and capital gains
13
Q
Example of bonds?
A
Debt instruments
Loan stocks
14
Q
What are bonds?
A
A loan made by an investor to a company or government
15
Q
What do bondholders do?
A
make returns through interest paid on the bond (known as a coupon). They can also be traded
16
Q
What is an arranged overdraft?
A
When the bank lets you become overdrawn and has a fixed interest
17
Q
Features of an overdraft?
A
- able to spend more money than you have in your account
- no set date for repayment
- interest rate can be changed at any time
- high interest rate as it is short term only
- may have to pay a one off or annual arrangement fee
18
Q
what is a bank loan
A
a borrower receives a certain amount from a lender (a bank). the borrower agrees to pay a contracted rate of interest to the lender and agrees a repayment date
19
Q
a loan is normally for:
A
- set period, generally less than five years
- a set rate of interest
- with a defined repayment schedule
20
Q
what is an unsecured loan?
A
a loan provided to a borrower where the lender takes no security
21
Q
what is a secured loan?
A
situation where a lender takes something of value (asset) as security for a loan
22
Q
what is a mortgage?
A
long term loan used to finance the purchase of real estate. the money lent by the bank is secured against the value of the property. lender can take back property, if payments aren’t made
23
Q
features of mortgages:
A
- set period (25-35 years)
- fixed or variable rate of interest
- defined repayment schedule
- secured on the property the loan is used to buy
- cheapest form of borrowing
24
Q
overdrafts
A
borrowing from a bank where the lending bank can demand repayment at any time. account holder can with draw money from the account when they have a 0 balance
25
bank overdraft features:
- flexible - able to be drawn, repaid, drawn again up to the overdraft limit
- variable rate of interest
- arrangement fee
- unsecured and repayable on demand
26
problems with unauthorized overdrafts
they can be very expensive
27
how do pay day loans work?
money is paid directly into your bank account, and you repay with interest and charges at the end of the month
28
what are pay day loans meant for?
temporary financial problems
29
advantages of borrowers with a pay day loan
- easy to access
- fewer requirements than other loans
- 14 day cooling off period
30
disadvantages of borrowers with a pay day loan
- expensive to pay off, as you are paying more back
31
what changes were made to UK laws to regulate and control payday loans
- A price cap on high cost short-term credit
- Limits on how many times a payday loan could roll over
- Stronger guidance on affordability checks and financial health warnings
32
Features of a retail bank
- individuals are retail customers
- banks that provide these customers with services are known as retail banks
X the purpose is to attract deposits from savers and lend to borrowers
33
features of a commercial bank
- in the us it encompasses banks who attract in gaining a deposit and giving out loans
- " commercial bank" in some countries who provide services to businesses (aka corporate banking)
34
how do credit cards work?
offers a person a line of credit that can be used to make purchases, balance, transfers cash advance, requiring theta you pay back the loan amount in the future, from banks
35
advantages of credit cards for borrowers
- credit score
- flexible
- expense tracking
- cheap currency conversion
- prepared for emergencies
36
disadvantages of credit cards for borrowers
- credit card fees
- easy to overuse
- high interest charges
- can harm your credit score
- variable interest rate
37
possible problems with credit cards
repayment of at least a minimum amount are required monthly
38
how do pawnbrokers work?
let you borrow money in exchange for your valuables. you'll be able to get the item back if you repay the loan and interest on time, otherwise it'll be sold
39
advantages of pawn brokers for a borrower
- gain money quick and easily
- credit score is not checked
40
disadvantages of pawn brokers for a borrower
- have high interest rates
- will not lend the full value of the item, so you wont get the full value for the item
41
what is interest?
cost of borrowing
reward for saving
42
repaying a loan equation
capital + interest
normally expressed as a percentage
43
features of quoted rate of interest
- shows the cost of borrowing if interest is charged on an annual basis
- normally the interest rate lenders advertise to customers
- by law, lenders have to show this rate to customers
- consumers can easily compare financial products
44
features of effective annual rate (EAR)
- takes the quoted/ advertised rate and adjusts it to take into account the frequency of interest
- often, interest isn't charged yearly but on a quarterly/ monthly basis
- EAR is higher than quoted rate
45
how to work out the EAR
1. quoted rate/ frequency interest is charged
2. turn interest into decimal /100
3. add 1 to the decimal
4. multiply the no. by the times interest is charged
5. minus 1 to the decimal
6 turn back into a % x100
46
what do investment banks do?
- capital raising
- advise business wanting to borrow money in bond markets(debts)
- advise business when issuing shares (equity)
- advise businesses on strategy & growth (mergers/ acquisitions)
- buy/ sell financial assets to make a profit
47
what do retail banks do?
- gives credit cards
- personal loans for customers
- currency exchange
- mortgage lending
- provides savings and current accounts for individuals
- arranges overdrafts for customers
48
what do central banks do?
- issue notes and coins
- acts as a banker to the banking system
- regulates domestic banking
- holds nations gold and money supply
- sets official short term rate of interest(base/ bank rate)
- manages national debt
- controls money supply
49
what is monetary policy
adjusting interest rates (to control inflation) and the money supply to manage fluctuations in economic activity
50
what is fiscal policy
the use of government spending and tax policies to influence economic conditions
51
what is the overall role of the MPC
monitor developments in the economy to monitor the inflation targets
52
what is the overall role of the FPC
asses the risks facing the financial system
53
target inflation rate?
2%
54
how often does the MPC meet
every 3 months
55
what is initial public offering (IPO)?
the first time shares are offered to members of the public via a stock exchange. the business becomes a PLC.
shares = equities
56
who are shares in IPO initially sold to?
institutional investors e.g. pensions, as well as a smaller proportion to the public
57
primary market for shares
existing company that is looking to expand. company sells shares to investors for the first time
58
secondary market for shares (referred to as dealing)
company that's listed -> investors may wish to dispose of some or all their shares adn will do this through the stock exchange trading system
59
benefits of IPO's
-raising capital by selling shares
- increasing public profile
- after the iPo its easier to buy and sell shares as they are being traded on the stock exchange. so shares have become liquid
60
drawbacks of IPO
- responsibility to shareholders which can cause conflicts
- original owners lose outright control of the business
- opens up the company to a takeover
- greater scrutiny and levels of regulations to abide by
61
what are capital gains?
equivalent of making a profit when selling shares have increased in value
62
drawbacks of capital gains
- share prices can be volatile so may not make any cash
- unrealized shares aren't sold adn capital gains aren't cashed
- capital gains tax ,
63
what are dividends
on going income that a shareholder may receive as a reward for being a shareholder in a listed company
64
drawbacks of dividends
income tax 7.5% base rate, 32.5% higher rate
not always paid back
-if a company is new
-mature company may reinvest profits
-expense of issuing new shares to raise capitals
-poor financial performance
65
dividend yield equation
total dividends/market capitalization (total value of firms shares) x 100
dividend per share/share price x1 00
66
AGM (annual general meetings):
- once a year
-give shareholders an opportunity to find out the firms performance and make decisions on its future
- executives can be questioned
- decisions are voted upon and the majority wins
67
what's the differences between an ordinary resolution and a special one?
ordinary - 51% to pass
special - 75% to pass
68
what are shareholders rights?
- to attend company meetings
- to vote at meetings
- "pre-emptive" right to buy or receive new shares offered by the company
69
risks that shareholders face?
- price risk, share prices may fall
- liquidity risk- difficulty selling shares
- issuer risk, share may become worthless
- foreign exchange risk
70
What is a bond
A debt instrument where by an investor lends money to an entity that borrows the funds for a defined period of time at a fixed interest rate
71
Who issues bonds
By government and corporations when they want to raise money
Government = government bonds
Companies = corporate bonds
72
Why are bonds issued
For the issuer to raise finance perhaps to fund something in particular
73
Definition of green bonds
Bonds issued that fund activities that are environmentally responsible
74
Definition of blue bonds
Bonds issued that fund activities that conserve oceans
75
What are corporate bonds
Bonds issued by companies
76
What is a federal budget
Expected income and expenditure of the US for a period of time
77
What is a face/nominal value
Amount that is owed by the bond issuer and will be repaid on the repayment date
78
What is the redemption/maturity date
The repayment date fro the bond
79
Definition of a coupon?
Interest rate that’s applied to the nominal value
80
What are gilts
Uk government bonds, they are known as this as the first certificates had a gold edge
81
Why do the uk and us governments issue bonds
When total receipts (taxes) are less than total expenditure
82
Definition of stock name
Name of the bond thats set by the issuer
83
What factors does the repayment date depend on?
- financial plans of the company
- periods when investors want to invest
84
Bond features:
- repayment date
- trade able
- interest rate and frequency
85
Whats yield another word for
Return
86
Relationship between bond and yield prices
Inverse relationship between yield and bond prices
87
Advantages of bonds
- fixed date and amount to be repaid at redemption
- Predictable income in the form of regular, fixed coupons
88
Disadvantage of bonds
- actual default - the failure of the issuer to be able to pay the coupons and/or the redemption amount
- an increased risk of default resulting in the fall in the bonds value
89
Credit rating agencies
Looks at bond issuers and assess the credit risk
90
Whats a companies two choices to raise finance?
- raise money by borrowing
- raise money by selling more equity
91
What is leverage
Leverages is the proportion of debt finance compared to equity finance in the company
92
What is financial leverage in a business
Proportion of debt relative to the equity within a business
