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BPP FIN > Module 14 > Flashcards

Module 14 Flashcards

(115 cards)

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1
Q

What are the three areas of the financial sector?

A

Banking
Insurance
Asset management

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2
Q

Two types of banks?

A

Commercial bank

Investment banks

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3
Q

What is a commercial bank?

A

Collects deposits from individuals and companies and lends money to them when they wish to borrow

Intermediary between borrowers and lenders

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4
Q

Customers who deposit money in the bank are?

A

The banks creditors

Effectively borrowing their money

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5
Q

Customers to whom the bank lends money are?

A

The banks debtors

Customers owe the bank

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6
Q

What is financial intermediation?

A

The process of pooling funds from different sources and testing them to provide loans and make investments

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7
Q

Investment banking includes activities such as

A

Providing advice to corporate customers who want to raise finance

Managing corporate mergers and acquisitions

Buying and selling shares and ones on behalf of corporate and private as well as for bank itself

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8
Q

What is a building society?

A

Similar to commercial bank

Must take a substantial proportion of its funds from members who are private individuals

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9
Q

What is a credit union?

A

Accepts funds from those who share a common bond
Advanced to meet personal borrowing needs
Mutual, members are the owners

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10
Q

What is NS&I?

A

National savings and investment

Takes deposit from public to fund some of governments borrowing needs

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11
Q

What are mutual organisations?

A

Owned by its members - the organisations savers, investors and borrowers

Members nearly always have one vote each

Don’t received dividends
Return takes the form of interest

Most building societies start as MO, most BS converted to LC

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12
Q

What is securitisation?

A

Assets which are illiquid are pooled together and transforms them into a more liquid security

  • commonly mortgages (mortgage backed security)
  • investment bank will buy mortgages from a commercial bank, packager them together and sell the new security
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13
Q

What happened with mortgage backed security?

A

Become so valuable to commercial banks they started to sell more without proper credit checks

Riskier mortgages classed as SUB PRIME

when customers defaulted they became worthless- collapse in value of MBSc and devaluation of balance sheet

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14
Q

What can insurance provide cover for?

A

Loss of an asset (house, car)
Creation of a liability (accidental damage etc)
Pure financial losses (legal expense, credit insurance etc)

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15
Q

What is insurance?

A

Risk pooling and transfer mechanism through which buyer pays a premium to mitigate one or more risks

Buyer compensated should risk materialise

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16
Q

What does an underwriter do?

A

Assessed risks and quotes premium based on how likely and how much

Once premium paid, insurance company accepts liability subject to terms

As long as total premiums received more than covers claims it is viable

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17
Q

What are the three horse sectors of insurance?

A

Personal lines
Life insurance/assurance
Commercial lines

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18
Q

Difference between life assurance and insurance?

A

Insurance - if die within period of time

Assurances- when someone dies irrespective of when

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19
Q

What forms can life assurance/insurance take?

A

Term insurance policies
Whole of life
Endowment - combines life insurance and savings (will repay mortgage should holder die)

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20
Q

Risk of insurance policies

A

Insurance company may fail

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21
Q

Investment management involves?

A

The investment of clients assets to meet predetermined objects

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22
Q

Objectives of investment fall into what categories?

A

Maximise returns

Match liabilities

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23
Q

What are collective investment schemes?

A

Pool money into large funds which can be invested on their behalf by professional fund managers

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24
Q

Advantages of collective investment schemes?

A 
Small amounts
Professional fund managers
Dealing costs split
Diversified spread reduces risk
No capital gains tax
Exposure to foreign stocks
Different funds for different objectives
Specialisation
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25
Disadvantages of collective investment schemes?
Can’t choose own investments Manager may change jobs, future management less certain Large funds find it difficult to invest in companies with small cap due to small quantities available Fees
26
Collective funds may be either?
Onshore- held and managed in UK, UK regs and taxes | Offshore
27
Onshore funds may take what forms?
Unit trusts Open ended investment companies Investment trusts
28
What is a unit trust?
Open ended fund Creates new units when new investors subscribe and can cancel units Monitored by trustees Objectives in trust deed Dual price (bid/offer)
29
What are the three parties involved in the operation of a unit trust?
Unit trust manager (market, price, buy/sell units) Trustee - normally bank or insurance company, holds investments on behalf (safeguards, regs) Fund manager - deals in funds assets
30
The value of the underlying fund in unit trusts is?
Determined regularly (normally daily) as the VALUATION POINT
31
Unit trusts, if purchases exceed sales or vice versa?
Purchases exceed sales, unit trust manager must create new units and invest excess Sales exceed purchases, must legislate some unites (sell some investments)
32
Unit trust managers acts as a?
Market maker for units Quotes buying and selling prices Profit made on different eve teen offer (selling) and bid (buying) price Known as bid-offer spread
33
What are Open ended investment companies?
Open ended, can continually issue and redeem own shares Must use a depositary to look after funds Single or dual pricing at valuation point Listing optional
34
What are investment trusts?
Public limited companies who’s shares are listed on a stock exchange Closed ended Is sure fixed amount of shares Traded between buyers and sellers Pricing government by supply and demand- premium or discount
35
What do net asset value?
Price of unit trust or OEIC based on NAV of the fund Primary responding of each fund manager is the calculation of an accurate NAV each day Use NAV to make decisions
36
What are the three alternative investment management styles?
Active Passive Hybrid
37
What is active management?
Changes portfolio on regular basis At times winners can be found Attempt to time purchases or sales on basis of info to make abnormal returns
38
What is passive management?
Believe in the efficient market hypothesis Design funds to mirror specific indices without attempting to beat the market Little active intervention May need some in response to events
39
What are hybrid managers?
Outperform indices Less passive approach Mixture of passive and active
40
What is private equity?
Source of medium to long term finance for an unlisted company, in return for an equity stake Main source are private equity firms (larger sums at later stage) and business angels (individuals who invest smaller amounts at early stage)
41
Private equity investors look for potential for realistic growth
Seek an exit route when they believe the growth has fallen to normal levels
42
Private equity exit routes can be achieved by?
``` Floating - take public Trade sale Management buy out Share repurchase Refinancing Liquidation ```
43
The Bank of England aims to?
Promote the food of the people of the UK by maintain monetary and financial stability
44
What is monetary stability?
Prices are stable and there is confidence in the local currency
45
What is financial stability?
Can be achieved through detecting and reducing threats to financial system as a whole Maintaining public confidence
46
What does Bank of England do?
Governments bank, manages its bond finance and uses to affect interest rates Lender of last resort- funds in exceptional circumstances
47
What is the financial policy committee?
Formed in 2013 as a Response to failings Looks for risks and weaknesses in financial system Made up of 13 experts who meet quarterly and at times of crisis Sets : min cap, limits on gearing, forward looking loss provisioning, limits on borrowing, regs
48
What is the prudential regulation authority?
Subsidiary of the bank | Responsible for ensuring the safe operation of around 1500 deposit taking institutions
49
PRAs statutory objectives?
Minimise adverse effects of firm failure Secure protection for policyholders Facilitate effective competition
50
What does the financial conduct authority do?
Responsible for consumer protection in financial services Powers to: Take action for insider dealing or market abuse Recognise investment exchanges and clearing houses Approve companies for the stock exchange
51
What is the HM treasury?
Economics and finance ministry Formulating and implements the financial and economic policy Chancellor of exchequer overall responsibility Aim to raise rate of substantial growth Rise prosperity and better quality of life
52
Authorisation required for?
Any individual or firm carrying out a regulated activity must be authorised or exempt Dual regulated - PRA, FCA approval Other - FCA
53
Regulated activities?
``` Accepting deposits Principal or agent for investments Mortgage contracts CIS Advice ```
54
Excluded from requirement for authorisation?
Trustees nominees and reps Employee share schemes Media Oversees
55
Regulation of banks additional regs?
MiFID: EU directive harmonising rules Basel Accords: strengthen by implementing capital ratios. 3 parts. - min cap requirements - systems of governance - publish details of risk Accountability regime: remedy errant behaviour
56
Role of FCA in collective investments
Authorise and regulate UK funds Only authorised and regulated funds can be marketed to general public OEICs Auth unit trusts Recognised overseas Controls content of trusts deed and pricing Right to revoke Right to appoint inspectors Supply info
57
Investment powers of investment trust companies limited by Articles of Association and LSE rules:
70% of income must be derived from investments in shares and other specified No individual Investment can total more than 15% of the fund
58
What are the three areas of the financial sector?
Banking Insurance Asset management
59
Two types of banks?
Commercial bank | Investment banks
60
What is a commercial bank?
Collects deposits from individuals and companies and lends money to them when they wish to borrow Intermediary between borrowers and lenders
61
Customers who deposit money in the bank are?
The banks creditors | Effectively borrowing their money
62
Customers to whom the bank lends money are?
The banks debtors | Customers owe the bank
63
What is financial intermediation?
The process of pooling funds from different sources and testing them to provide loans and make investments
64
Investment banking includes activities such as
Providing advice to corporate customers who want to raise finance Managing corporate mergers and acquisitions Buying and selling shares and ones on behalf of corporate and private as well as for bank itself
65
What is a building society?
Similar to commercial bank | Must take a substantial proportion of its funds from members who are private individuals
66
What is a credit union?
Accepts funds from those who share a common bond Advanced to meet personal borrowing needs Mutual, members are the owners
67
What is NS&I?
National savings and investment Takes deposit from public to fund some of governments borrowing needs
68
What are limited companies?
Owned by shareholders who’s capital fund the business Board of directors are agents Limited liability - can’t lose more capital than committed
69
What are mutual organisations?
Owned by its members - the organisations savers, investors and borrowers Members nearly always have one vote each Don’t received dividends Return takes the form of interest Most building societies start as MO, most BS converted to LC
70
What is securitisation?
Assets which are illiquid are pooled together and transforms them into a more liquid security - commonly mortgages (mortgage backed security) - investment bank will buy mortgages from a commercial bank, packager them together and sell the new security
71
What happened with mortgage backed security?
Become so valuable to commercial banks they started to sell more without proper credit checks Riskier mortgages classed as SUB PRIME when customers defaulted they became worthless- collapse in value of MBSc and devaluation of balance sheet
72
What can insurance provide cover for?
Loss of an asset (house, car) Creation of a liability (accidental damage etc) Pure financial losses (legal expense, credit insurance etc)
73
What is insurance?
Risk pooling and transfer mechanism through which buyer pays a premium to mitigate one or more risks Buyer compensated should risk materialise
74
What does an underwriter do?
Assessed risks and quotes premium based on how likely and how much Once premium paid, insurance company accepts liability subject to terms As long as total premiums received more than covers claims it is viable
75
What are the three horse sectors of insurance?
Personal lines Life insurance/assurance Commercial lines
76
Difference between life assurance and insurance?
Insurance - if die within period of time | Assurances- when someone dies irrespective of when
77
What forms can life assurance/insurance take?
Term insurance policies Whole of life Endowment - combines life insurance and savings (will repay mortgage should holder die)
78
Risk of insurance policies
Insurance company may fail
79
Investment management involves?
The investment of clients assets to meet predetermined objects
80
Objectives of investment fall into what categories?
Maximise returns | Match liabilities
81
What are collective investment schemes?
Pool money into large funds which can be invested on their behalf by professional fund managers
82
Advantages of collective investment schemes?
``` Small amounts Professional fund managers Dealing costs split Diversified spread reduces risk No capital gains tax Exposure to foreign stocks Different funds for different objectives Specialisation ```
83
Disadvantages of collective investment schemes?
Can’t choose own investments Manager may change jobs, future management less certain Large funds find it difficult to invest in companies with small cap due to small quantities available Fees
84
Collective funds may be either?
Onshore- held and managed in UK, UK regs and taxes | Offshore
85
Onshore funds may take what forms?
Unit trusts Open ended investment companies Investment trusts
86
What is a unit trust?
Open ended fund Creates new units when new investors subscribe and can cancel units Monitored by trustees Objectives in trust deed Dual price (bid/offer)
87
What are the three parties involved in the operation of a unit trust?
Unit trust manager (market, price, buy/sell units) Trustee - normally bank or insurance company, holds investments on behalf (safeguards, regs) Fund manager - deals in funds assets
88
The value of the underlying fund in unit trusts is?
Determined regularly (normally daily) as the VALUATION POINT
89
Unit trusts, if purchases exceed sales or vice versa?
Purchases exceed sales, unit trust manager must create new units and invest excess Sales exceed purchases, must legislate some unites (sell some investments)
90
Unit trust managers acts as a?
Market maker for units Quotes buying and selling prices Profit made on different eve teen offer (selling) and bid (buying) price Known as bid-offer spread
91
What are Open ended investment companies?
Open ended, can continually issue and redeem own shares Must use a depositary to look after funds Single or dual pricing at valuation point Listing optional
92
What are investment trusts?
Public limited companies who’s shares are listed on a stock exchange Closed ended Is sure fixed amount of shares Traded between buyers and sellers Pricing government by supply and demand- premium or discount
93
What do net asset value?
Price of unit trust or OEIC based on NAV of the fund Primary responding of each fund manager is the calculation of an accurate NAV each day Use NAV to make decisions
94
What are the three alternative investment management styles?
Active Passive Hybrid
95
What is active management?
Changes portfolio on regular basis At times winners can be found Attempt to time purchases or sales on basis of info to make abnormal returns
96
What is passive management?
Believe in the efficient market hypothesis Design funds to mirror specific indices without attempting to beat the market Little active intervention May need some in response to events
97
What are hybrid managers?
Outperform indices Less passive approach Mixture of passive and active
98
What is private equity?
Source of medium to long term finance for an unlisted company, in return for an equity stake Main source are private equity firms (larger sums at later stage) and business angels (individuals who invest smaller amounts at early stage)
99
Private equity investors look for potential for realistic growth
Seek an exit route when they believe the growth has fallen to normal levels
100
Private equity exit routes can be achieved by?
``` Floating - take public Trade sale Management buy out Share repurchase Refinancing Liquidation ```
101
The Bank of England aims to?
Promote the food of the people of the UK by maintain monetary and financial stability
102
What is monetary stability?
Prices are stable and there is confidence in the local currency
103
What is financial stability?
Can be achieved through detecting and reducing threats to financial system as a whole Maintaining public confidence
104
What does Bank of England do?
Governments bank, manages its bond finance and uses to affect interest rates Lender of last resort- funds in exceptional circumstances
105
What is the financial policy committee?
Formed in 2013 as a Response to failings Looks for risks and weaknesses in financial system Made up of 13 experts who meet quarterly and at times of crisis Sets : min cap, limits on gearing, forward looking loss provisioning, limits on borrowing, regs
106
What is the prudential regulation authority?
Subsidiary of the bank | Responsible for ensuring the safe operation of around 1500 deposit taking institutions
107
PRAs statutory objectives?
Minimise adverse effects of firm failure Secure protection for policyholders Facilitate effective competition
108
What does the financial conduct authority do?
Responsible for consumer protection in financial services Powers to: Take action for insider dealing or market abuse Recognise investment exchanges and clearing houses Approve companies for the stock exchange
109
What is the HM treasury?
Economics and finance ministry Formulating and implements the financial and economic policy Chancellor of exchequer overall responsibility Aim to raise rate of substantial growth Rise prosperity and better quality of life
110
Authorisation required for?
Any individual or firm carrying out a regulated activity must be authorised or exempt Dual regulated - PRA, FCA approval Other - FCA
111
Regulated activities?
``` Accepting deposits Principal or agent for investments Mortgage contracts CIS Advice ```
112
Excluded from requirement for authorisation?
Trustees nominees and reps Employee share schemes Media Oversees
113
Regulation of banks additional regs?
MiFID: EU directive harmonising rules Basel Accords: strengthen by implementing capital ratios. 3 parts. - min cap requirements - systems of governance - publish details of risk Accountability regime: remedy errant behaviour
114
Role of FCA in collective investments
Authorise and regulate UK funds Only authorised and regulated funds can be marketed to general public OEICs Auth unit trusts Recognised overseas Controls content of trusts deed and pricing Right to revoke Right to appoint inspectors Supply info
115
Investment powers of investment trust companies limited by Articles of Association and LSE rules:
70% of income must be derived from investments in shares and other specified No individual Investment can total more than 15% of the fund

BPP FIN (14 decks)

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