Learning Aim A

Question 1

Name any of the four functions of money.

Answer 1

1. Unit of account - allows us to place a monetary value on goods and services.
2. Means of exchange - Allows us to trade.
3. Store of value - allows us to use it in the future as it keeps its value.
4. Legal tender - legally recognised form of payment by government.

Question 2

What specific factors can impact a person’s view of money?

Answer 2

1. Personal attitudes
2. Life stages
3. Culture
4. Life events
5. External influences
6. Interest rates

Question 3

What is a credit rating?

Answer 3

A score given to individuals on how likely they are to repay debts based upon their previous actions - the higher the better chance they have of being offered things such as loans or mortgages.

Question 4

What are some reasons people plan their expenditure?

Answer 4

1. Avoid getting into debt
2. Set financial targets and goals
3. Maintain a good credit rating
4. Generate income and savings
5. Avoid bankruptcy
6. Provide insurance against loss or illness

Question 5

What is cash?

Answer 5

Notes and coins in a wide range of denominations.

Question 6

What are the advantages of using cash as a method of payment?

Answer 6

1. Most widely accepted form of exchange
2. Physical not virtual
3. Consumers feel confident when using it

Question 7

What are the disadvantages of using cash as a method of payment?

Answer 7

1. Can be lost or stolen
2. Threat of counterfeit
3. Cannot be used online

Question 8

What is a debit card?

Answer 8

Issued by bankers with payments for goods and services being deducted directly from a current account.

Question 9

What are the advantages of using a debit card as a method of payment?

Answer 9

1. No need to carry cash
2. Suitable for online transactions
3. Secure method of payment with low risk of theft

Question 10

What are the disadvantages of using a debit card as a method of payment?

Answer 10

1. Not accepted or appropriate for small transactions.
2. Short time lapse between making the transaction and the money being withdrawn from the customer’s account may result in overspending.

Question 11

What is direct debit?

Answer 11

An agreement made with a bank allowing a third party to withdraw money from an account on a set day to pay for goods or services received, e.g. pay a gas bill.

Question 12

What are the advantages of using direct debit as a method of payment?

Answer 12

1. An easy way to make regular payments, e.g. utility bills
2. Quick and easy to set up
3. Amount paid can vary to ensure the payment matches the amount required by the vendor

Question 13

What are the disadvantages of using direct debit as a method of payment?

Answer 13

1. The payer determines the amount paid each time making it difficult for the payer to plan and budget.
2. If the payer makes a mistake and takes too much it is the payee’s responsibility to claim back the money.

Question 14

What is a standing order?

Answer 14

An agreement made with a bank to transfer a fixed sum of money to a third party account on a set date on a regular basis, e.g. pay £30 for a phone contract each month.

Question 15

What are the advantages of using a standing order as a method of payment?

Answer 15

1. Easy both to set up and cancel
2. No need to remember to make regular, standard payments
3. The same amount is paid each time making it easier for the payee to plan and budget.

Question 16

What are the disadvantages of using a standing order as a method of payment?

Answer 16

1. Payments will continue to be made unless cancelled
2. Payments are taken regardless of the customer’s balance which could lead to the unplanned use of an overdraft facility.

Question 17

What is the Clearing house automated payment systems (CHAPS)?

Answer 17

A system that allows the transfer of payments directly from one bank account to another.

Question 18

What is the advantages of *CHAPS?

Answer 18

1. There is no limit on the amount that can be transferred in a single transaction
2. Transfers can be made the same day assuming instructions are received prior to a set time, e.g. 2 pm at Barclays.

Question 19

What are the disadvantages of *CHAPS?

Answer 19

1. There is a fixed charge per transaction regardless of the amount tranferred

Question 20

What is Banker’s automated clearing service (BACS) faster payments?

Answer 20

A system that allows the transfer of payments directly from one bank account to another.

Question 21

What are the advantages of *BACS faster payments?

Answer 21

1. Faster payments allow almost instant transfers that are guaranteed within 2 hours.
2. Can be accessed in a number of ways including in a branch, over telephone and online.
3. No additional costs

Question 22

What are the disadvantages of *BACS faster payments?

Answer 22

1. A limit is set on the amount that can be transferred in a single transaction.
2. Faster payment is not offered by all banks or branches and the customer may therefore have to default to BAC’s which can take three days to transfer.

Question 23

What is a pre-paid card?

Answer 23

Money is uploaded onto a card with transactions then being withdrawn to reduce the balance.

Question 24

What are the advantages of a pre-paid card as a method of payment?

Answer 24

1. Can set a budget in advance to avoid overspending
2. If lost or stolen the loss is limited to the remaining balance
3. An effective way of controlling the amount spent by children and where money is spent, e.g. upload money for school lunches or transport.

Question 25

What are the disadvantages of using a pre-paid card as a method of payment?

Answer 25

1. No protection if lost 2. Sometimes requires an initial fee to purchase or set up the card, e.g. Oyster travel cards.

Question 26

What is a charge card?

Answer 26

Issued by financial institutions allowing customers to delay payments for goods and services for a short period of time; the balance must be paid off in full when a statement is issued.

Question 27

What are the advantages of using a charge card as a method of payment?

Answer 27

1. Reduces risk of running up debts 2. Avoids the need to carry cash 3. Often offers additional perks

Question 28

What are the disadvantages of using a charge card as a method of payment?

Answer 28

1. Must be paid in full each month 2. Often an annual fixed fee is applied

Question 29

What is a current account?

Answer 29

An account with a bank or building society designed for frequent use, e.g. regular deposits and withdrawals.

Question 30

What is an overdraft?

Answer 30

The ability to withdraw money that you do not have from a current account.

Question 31

What is a standard current account?

Answer 31

Normal account offered to customers with a reasonable credit rating - includes features like ability to pay and withdraw money, debit card, interest payments on positive balances and pre- agreed overdraft limits.

Question 32

What is a premium current account?

Answer 32

Offers additional features to a standard account - house and car insurance, credit card protection, breakdown cover. May be additional charges for these accounts.

Question 33

What is a basic current account?

Answer 33

Offers only limited features designed for customers with poor credit rating who may struggle to open a bank account elsewhere - does not offer overdraft and does not pay interest on positive balances.

Question 34

What is a student current account?

Answer 34

Designed for students - include an agreed overdraft limit and incentives, e.g. free rail cards or cash.

Question 35

What are the advantages of a standard current account?

Answer 35

1. No charges on credit balances 2. Convenient for receiving regular payments, e.g. wages 3. Offers holder facilities, e.g. debit/cash card and overdraft facility

Question 36

What are the disadvantages of using a standard current account?

Answer 36

1. Potentially high charges on the use of an overdraft facility 2. Standard features only, e.g. no additional perks

Question 37

What are the advantages of a premium current account?

Answer 37

1. Offers holder additional perks, e.g. holiday/travel insurance, breakdown cover, phone protection. 2. Convenient for receiving regular payments, e.g. wages 3. No charges in credit balances

Question 38

What are the disadvantages of a premium current account?

Answer 38

1. Additional monthly charge is frequently applied 2. The package offered may not offer value for money or meet the needs of the individual account holder.

Question 39

What are the advantages of using a basic current account?

Answer 39

1. Available to customers with a low credit rating 2. Offers easy first step for individuals to gain access to basic banking facilities, e.g. ability to pay in and withdraw cash.

Question 40

What are the disadvantages of a basic current account?

Answer 40

1. Limited facilities, e.g. no debit card or overdraft facility

Question 41

What are the advantages of a student current account?

Answer 41

1. Course fees and student loans can be easily handled 2. Bonuses offered are designed to meet the needs of learners, e.g. discounts on travel or small lump sum cash payments.

Question 42

What are the disadvantages of a student current account?

Answer 42

1. Overdraft facilities could encourage overspending 2. Charges for overspending are high 3. Limited facilities

Question 43

List three different types of borrowing.

Answer 43

1. Overdraft 2. Personal loan 3. Hire purchase 4. Mortgage 5. Credit card 6. Payday loan

Question 44

What is a personal loan?

Answer 44

Gives someone ability to borrow set amount of money to be paid back in regular instalments with interest, e.g. home improvements.

Question 45

What are the advantages of a personal loan as a form of borrowing?

Answer 45

1. Regular, pre-agreed payments make planning and budgeting easier 2. Suitable when buying medium to high priced items, e.g car

Question 46

What are the disadvantages of a personal loan as a form of borrowing?

Answer 46

1. Not suitable for short term loans 2. May have to be secured against an asset, meaning missed payment could result in repossession to cover debt.

Question 47

What is hire purchase?

Answer 47

Allows someone to have an item immediately but pay for it in regular instalments - property of seller until paid in full.

Question 48

What are the advantages of hire purchase as a form of borrowing?

Answer 48

1. Spreads cost of an expensive item over a period of time 2. Credit secured against specific item

Question 49

What are the disadvantages of hire purchase as a form of borrowing?

Answer 49

1. Interest charge may be higher than traditional loans 2. Ownership not fully a buyers until instalments have been paid 3. Agreements can be manipulated to make a purchase seem deceptively appealing.

Question 50

What is a payday loan?

Answer 50

Short term form of finance used to bridge gap between now and next receiving a wage - only available in small amounts with high interest.

Question 51

What is a shareholder?

Answer 51

Someone who has invested in a company in return for equity, e.g. a share of the business.

Question 52

What is an individual savings account (ISA)?

Answer 52

Type of savings account where the holder is not charged income tax on interest received.

Question 53

What are the advantages of an ISA as a form of saving?

Answer 53

1. Tax is not charged on interest received allowing saver to keep all of the rewards for saving. 2. Interest rate sometimes slightly high than alternative savings accounts

Question 54

What are the disadvantages of an ISA as a form of borrowing?

Answer 54

1. There is a set limit on annual amount that can be placed in an ISA 2. Notice required to make withdrawals and may be a set limit in number of withdrawals made. 3. Penalty may be given for making more withdrawals than agreed previously

Question 55

What are premium bonds?

Answer 55

Government scheme allows individuals to save up to set amount by buying bonds - bold holder does not receive interest on savings but each bond placed in regular draw for cash prizes.

Question 56

What are the advantages of premium bonds as a form of saving?

Answer 56

1. Chance of winning substantially more than could be earned in interest 2. Can be easily withdrawn with no loss or penalty

Question 57

What are the disadvantages of premium bonds as a form of saving?

Answer 57

1. No guaranteed return on investment 2. Maximum amount reviewed annually by the government 3. Amount invested, assuming zero or low returns, loses value due to inflation

Question 58

What are bonds and gilts?

Answer 58

Fixed term securities where lender lends money to companies and governments in return for interest payments - money invested for a specified period of time.

Question 59

What are the advantages of bonds and gilts as a form of investment?

Answer 59

1. Regular fixed returns 2. Spreads risk across a range of markets

Question 60

What are the disadvantages of bonds and gilts as a form of investment?

Answer 60

1. Risk of losing some or all of the value of investment if bond or guilt value falls 2. Interest payments may not be received if issuer is unable to make payments

Question 61

What are shares?

Answer 61

Investment into a business in return for equity - shareholder receives dividends from company’s profits and want value of shares to increase.

Question 62

What are the advantages of shares as a form of investment?

Answer 62

1. Shareholders’ returns can include dividend payments and an increase in share value. 2. As part owner of a business there may be additional benefits, e.g. discounts and special offers. 3. Share prices fluctuate offering potentially high reward

Question 63

What are the disadvantages of shares as a form of investment?

Answer 63

1. Share prices fluctuate offering a potential high risk 2. There is no guarantee of any reward or return as all of investment can be lost

Question 64

What is a pension?

Answer 64

Long term savings plan where individuals make regular contributions, called premium payments, throughout working life - later repaid as lump sum, regular payment or both upon retirement; Can be state, company or private.

Question 65

What are the advantages of a pension as a form of saving?

Answer 65

1. Encourages people to save throughout working life for retirement 2. Regular payments deducted, meaning individuals is tied to make regular contributions. 3. Employers sometimes contribute, boosting savings amount

Question 66

What are the disadvantages of a pension as a form of saving?

Answer 66

1. Movement between jobs may mean one policy stops and another starts, reducing cumulative value of savings. 2. Final outcome difficult to predict 3. Compulsory payments may affect short term living standards

Question 67

What are the potential risks of saving?

Answer 67

1. Inflation can reduce the spending power of money saved 2. Low or zero risk as money saved is guaranteed to be available in future

Question 68

What are the potential rewards of saving?

Answer 68

1. Interest payments 2. Financial security/peace of mind

Question 69

What are the potential risks of investment?

Answer 69

1. Investments can go wrong and all or some of value may be lost 2. No guarantee of returns

Question 70

What are the potential rewards of investment?

Answer 70

1. Potential for high financial return than could be earned in interest 2. Can be exciting - some people invest for entertainment

Question 71

What is insurance?

Answer 71

An agreement with a third party to provide compensation against financial loss in line with the conditions laid down in the policy agreement.

Question 72

What are premiums?

Answer 72

Regular payments made by an individual or company to an insurance provider in return for protection.

Question 73

Name any of the six types of insurance.

Answer 73

1. Car insurance 2. Pet insurance 3. Travel insurance 4. Health insurance 5. Home and contents insurance 6. Life assurance and insurance

Question 74

What is life assurance and insurance?

Answer 74

1. Life assurance - ongoing policy to lay a lump sum upon death 2. Life insurance - policy for a period to pay a lump sum if you did within agreed period.

Question 75

What are the advantages of life assurance and insurance?

Answer 75

1. Provides peace of mind to family following the bereavement of a homeowner.

Question 76

What are the disadvantages of life assurance and insurance?

Answer 76

1. If policy holder does not die within period of life insurance no payment is made (could be seen as an advantage also).