Part B Questions 1

Question 1

Key functions of the financial system and two roles of financial intermediaries?

Answer 1

Key functions
- channels savings to investment and provides liquidity and payment mechanisms
-offers financial services (insurance and pensions)
-helps with risk management

Intermediaries
- banks and building societies etc transform maturities and reduce risk
- they create liquid liabilities (deposits) from liquid assets (loans) and thus perform maturity transformations

Question 2

How do you calculate interest gained

Answer 2

Amount invested x interest rate x(amount of days/365)

Question 3

How to work out the price an investor would pay

Answer 3

Discount - amount x discount rate x (amount of days/days in the year)
Price paid = amount - discount

Annualised yield = (discount / price) x amount days in year/days to yield