financial studies topic 4- unit 2

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why is risk associated with probability?
the risk of an adverse event is higher when a situation makes it more likely something will go wrong
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why is risk associated with chance?
the outcome could be favourable or adverse, this is known as speculative risk
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why is risk associated with motivation?
people are willing to take risks if there may be a reward
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what is trade off in relation to risk and reward?
someone who wants a high rate of return must accept a higher level of risk or loss
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how could public policy nowadays result in the loss of uninsured deposits in current accounts?
it is now public policy not to bail out banks that are in trouble
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how could investing in shares in an established company be risky?
there is no diversification and if the business they have invested in fails, they could lose all the money they invested
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why are financial regulators concerned about low interest rates for savers?
risky investment products providing higher rewards are unsuitable for many samll savers and they may lose their money
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why is the interest rate charged on a mortgage cheaper than one quoted on a personal loan?
the interest they pay reflects the risk to the lender
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why would someone with a low risk tolerance invest in a unit trust?
it invests in many companies rather than only choosing one- the risks are spread
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what are 3 negative financial consequences for someone with a high risk acceptance?
they are willing to use a lot of credit products and are in danger of becoming over indebted, they risk losing any property secured on loans and they risk getting a bad credit rating
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what is the relationship between risk transfer and insurance?
this is when poeople pay a premium and pass the risk of loss or danger on to the insurance company
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what are the 4 main impacts of risk on a person's life?
the amount of money involved, the effect on lifestyle, the timing of the event and the frequency of the event
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how is the degree of risk calculated?
probability x impact = degree of risk
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how is the probability of an event happening likely to affect premiums charged?
if an event is more likely to happen the premium will be very expensive because it's a high risk
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what is the difference between whole of life assurance and term assurance?
whole of life assurance- sum is payable for the life assured, whenever the death happens, it remains in place until the holder dies or surrenders it. term assurance- sum assured is only payable if the policy holder dies before the end of the term
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how does term assurance policy work with a repayment mortgage?
teh sum assured decreases in annual steps to reflect the reductions in the amount owing on the loan
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how does life assurance manage a tax liability?
if a person expects to inherit money from someone, they can take out a policy to cover the inheritance tax that is payable when the person dies
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what is critical illness insurance?
it pays out a guaranteed lump sum if the person is diagnosed with a critical illness
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why does income insurance suit the self employed?
someone who is self employed has no financial safety net and even thsoe who are employed can only recieve their employer's sick pay for a specified amount of time
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how are savings an example of risk management?
they're the result of people making a deliberate decision not to spend all their income and put money away to cover future needs
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what does it mean if someone dies intestate?
they die without making a will
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what are 4 benefits of drawing up a will?
a person can decide what happens to their estate, they can provide for a partner where there's no civil partnership or marriage, they can make arrangements for theri children, they can minimise the amount of inheritance tax they pay
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what is a beneficiary and an executor?
beneficiary- the people to whom the money or possesions are being left to. executor- the people who are responsible for making sure the wishes of the dead are carried out as in the will
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what is the process for making a will valid?
must be made by someone who's over 18, sound of mind, aware of what it contains and making it voluntarily, must be made in writing and signed by person making the will in presence of 2 witnesses who can't benefit from it.
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what is the minimum value an estate can be valued at before inheritance tax has to be paid?
£325,000
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what percentage of tax has to be paid?
40%
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how is this reduced if the deceased pays 10% of their estate to charity?
it is reduced to 36%
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how much is the additional allowance on the value if it's passed on to direct descendants?
£100,000
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if property is being left to a spouse do they have to pay inheritance tax?
no
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what is a trust?
a financial relationship whereby property is held by one party (trustee) for the benefit of another (beneficiary)
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what is a trustee?
a trustee has the legal title to a property held by the trust and has the power to buy and sell assets on behlaf of the beneficiary
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what is a beneficiary?
the person designated to recieve the income of an estate that is subject to a trust
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what is a child trust fund?
a long term tax free savings account aiming to ensure all children in the UK have savings at the age of 18. they were replaced by junior ISAs
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what is a guardian?
someone who has the legal authority and corresponding duty to care for the person and property of another, known as a ward
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Card 2

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why is risk associated with chance?

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the outcome could be favourable or adverse, this is known as speculative risk

Card 3

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why is risk associated with motivation?

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Card 4

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what is trade off in relation to risk and reward?

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Preview of the front of card 4

Card 5

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how could public policy nowadays result in the loss of uninsured deposits in current accounts?

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