FSRE Topic 1

Question 1

What are the four main asset classes?

Figure 1.1 page 2

Paper A

Answer 1

Cash
Property
Fixed Interest
Shares

Question 2

Identify and describe the three characteristics of cash?

1.1.1 page 2

Paper A

Answer 2

Liquid: easily accessible and doesnt need to be converted or sold to make available.

Risk free: not subject to market forces but doesnt have potential growth in value.

Held on deposit: Can earn interest by keeping it in banks or building societies.

1.1.1 Page 2

Paper A

Question 3

What are the benefits of Cash?

1.1.1 Page 3

Paper A

Answer 3

Risk free income from interest

Easy to accesss in short term

Suitable for those who wish to build emergency funds

Question 4

What are the disadvantages of cash?

1.1.1 Page 3

Paper A

Answer 4

Not suitable for enhancing capital growth in the medium long term

Inflation can reduce real value over time

1.1.1 Page 3

Question 5

What are Money Market Instruments?

1.1.1 Page 3

Paper A

Answer 5

Short term (up to 12 months) cash based financial loans

Mainly used by business and governements

Question 6

What are the main types of Money Market Instruments.

1.1.1 Page 3

Paper A

Answer 6

Treasury bills
Commercial paper
Certificates of deposite (eg. saving accounts)

Question 7

How long do bonds usually last?

1.1.2

Answer 7

5 to 50 years

Question 8

What are the characteristics of bonds?

Can you define each term?

1.1.2

Answer 8

A coupon: Fixed interest paid each year

Par value: face value and amout that will be paid on redemption

Redemption date: the date when the government will repay the par value

Question 9

What 2 factors determine the price of the bond?

1.1.2 Paper A

Answer 9

Financial strength of issuer

Interest rates:
If rates increases during the term,you can sell the bond at a lower price than the par value, if sold before redemption date.

Question 10

Gilts – bonds issued by the UK governement

Treasury of 5% 2035 would be a gilt issued by the Treasury, paying 5% interest until 2035.

How much money would the gilt pay annually for every £100 par value?

1.1.2 Paper A

Answer 10

The gilt would pay £5 annually for every £100 par
value.

Question 11

What are the 3 benefits from bonds and gilts?

1.1.2

Answer 11

Fixed income for a fixed term

Repayment of initial capital

Potential gain if sold when interest rate drops.

Question 12

What are shares?
Can you state the benefits and disadvantages of shares?

1.1.3

Answer 12

Shares are sold to raise capital for investment in a comapany.

Benefits:
- High potential of capital growth
- Income through dividends

Disadvantages:
- High risk of loss
- Possibility of Dividends may not be paid
- High volitility
- Long term investment
- Not liquid like cash

Question 13

What are the two types of property?

1.1.4

Answer 13

Comercial and Residential property

Question 14

What are the important roles of the Bank of England in the UK economy?

1.2.1

Answer 14

1. Issuer of bank notes
2. Banker to the government
3. Banker to the banks
4. Advisor to the government
5. Manages Foreign exchange and Gold
6. Lender of last resort

Question 15

What are the 5 catagories of the financial markets?

1.3.2

Answer 15

1. Retail and wholesale business
2. secured or unsecured borrowing
3. Maturity borrowing and lending
4. Primary or secondary businesses
5. domestic currency of foreign exchange

Question 16

What is the difference between capital and money markets?

1.3.2.1

Answer 16

Capital Markets: Long term borrowing and lending
Money Markets: Short term borrowing and lending

Question 17

What is the difference between a Priamary and Secondary Market

Answer 17

Primary Markets raises new capital (buying shares from a comapany)

Secondary Market is a second hand market where the secuirities are traded (trading on a brockrages website)

Question 18

What is an interbank?

1.4.1

Answer 18

Loans between two banks

Question 18

If a bond has a coupon (interest
rate) of 5 per cent, the investor will receive
£5 for every £100 of face value owned.
What Yeild would they recieve if:

they paid £90 to buy the bond

they paid £120 to buy the bond

1.4.2

Answer 18

(Interest rate/pricepaid) x100

1. £5/£90 x100 = 5.56%
2. £5/£120 x100 = 4.17%

Question 19

Where are the 5 main international stock markets?

Answer 19

• New York
• Tokyo
• Germany
• France
• Hong Kong

1.4.3.2

Question 20

What is a financial Intermediary?

1.5.1

Answer 20

a financial intermediary is an institution that borrows money from the surplus sector of the economy at one rate and lends it to the deficit sector at a higher rate.

Question 21

What are three main reasons for individuals or companies to transfer between currencies?

1.4.4

Answer 21

• International trade
• Short term investment
• Long term investment

Question 22

Pros and Cons of Property

1.1.4

Answer 22

Pros

Capital growth through rent and value
Commercial has stable market
Cons

Vulnerable to economic conditions (no tenants)
Commercial is expensive to buy an run
Not liquid

Question 23

What are the six clearing banks in the UK

1.5.3

Answer 23

HSBC
Lloyds Banking Group
NatWest
Barclays
Bank of London
ClearBank

Question 24

What are Proprietary and Mutal Organisations? | 1.5.2.1

Answer 24

- Proprietary organisations are owned by their shareholders - Mutual organisations are not constituted as a company and are owned by the members

Question 25

What methods are used in Money Transmission

Answer 25

Provision of cash Cheque clearing Standing orders Current accounts

Question 26

Pros and Cons of Equities (Shares)

Answer 26

Pros More profit than deposit based investments Income through dividends Cons Risk of capital loss and dividends not paid Long-term Not as liquid as cash

Question 27

Money must have certain properties in order to be acceptable as a medium of exchange. What are they?

Answer 27

- sufficient in quantity; - generally acceptable to all parties in all transactions - divisible into small units; - portable

Question 28

Which two opposing groups take part in markets and what compromise do they have to make?

Answer 28

buyers and sellers

Question 29

Describe the reinsurance market

Answer 29

insurers that have already accepted risks are able to lay off some of the risk to other insurers. all risks insured are divided up between many insurers

Question 30

Why is it necessary for a strong secondary market to exist before a primary market in the same securities?

Answer 30

people will invest in new securities only if they know there is an organised market for selling them again.

Question 31

How does the ownership of a bank differ from that of a building society?

Answer 31

A bank is a proprietary organisation owned by its shareholders; a building society is a mutual owned by its members.