financial studies topic 6- unit 2

what must a person look at carefully in order to make an informed choice?
their wants and aspirations, their position on the risk/reward spectrum and the risk/reward spectrum of the product
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how is the amount of risk faced by someone calculated?
by looking at the joint effect of the probability of the risk happening and at the impact and severity of the risk if it does occur
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what are the 3 factors which affect where someone stands on the spectrum of willingness to take risks?
their personality (risk tolerance/averse), the amout of money they have at their disposal (someone with more money can afford to be risk tolerant) and the stage of the life cycle they're in (younger people more likely to be risk tolerant)
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why is willingness to take risks linked to stages in the personal life cycle?
youg people with no dependants might be willing to take big risks whereas a middle aged person with dependants and a mortgage would be more concerned about taking risks
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what is self insurance?
when people save money so they have money to fall back on in case the risk does arise
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what are 4 factors which influence the practice of self insurance?
whether there's a legal obligation to insure the risk e.g. 3rd party motor insurance, the cost of the insurance when balanced with the risk, the perception of the degree of the risk, the ability to access insurance
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what is the risk associated with saving?
that the provider may default and they may lose their uninsured deposits over the FSCS's £85,000
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how does inflation cause the real value of savings to fall?
the rise in inflation means that the value of money will be eroded
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what is the risk associated with borrowing?
the borrower ha to commit repaying out of their future income, but they cannot be sure they'll have enough to settle the debt in full
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what is the risk associated with insurance?
that the insurance company could fail and not be able to pay compenstion (although the FSCS cover either 90% or 100% of claims of failed insurers, depending on whether the insurance is compulsory)
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how can a customer consider a provider's risk profile?
they can consider; how safe and stable the provider is, the reputation it has for good and reliable services, how it can be regulated, how it can be accessed
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what can a customer use to make an informed choice about borrowing?
the strength of their want/aspiration, their own risk profile, the risk profile of the product they're intending to sell, the risk profile of the provider, the charges, any penalties, how flexible it is and the terms and conditions
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what 5 factors should a person consider when deciding if a product fits in with their financial plan?
the intended purpose, the timescale, the affordability, their attitude to risk and risk profile of the brand
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what is meant by financial products are examples of derived demand?
they aren't wants in themselves, but people buy them to enable them to achieve their wants
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what influences how much someone can afford to save?
their income, the amount of current spending in their short term plan, the necessity of saving and people's attitude to saving
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what influences how much someone can borrow?
their income, expenditure esp mandatory and necessary items, people's attitudes to borrowing, the time period of the loan and the neccessity of borrowing
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what is meant by joint demand?
two products that are bought together because they're complementary. the purchase of one product necessitates the purchase of another
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what is meant by competitive demand?
the opposite to joint demand as it's a situation in which 2 or more products fulfil the same need or want and therefore are in competition with each other for the customer's money. e.g. savings products vs borrowing products
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how does inflation affect savers?
savers' money loses value as inflation and prices rise and their position depends on whether they're recieving interest that covers the rate of inflation
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how does inflation affect borrowers?
money borrowed loses value and borrowers gain to this extent, but they pay interest and the interest rate will most certainly be higher than the rate of inflation
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how do interest rates affect borrowers?
if interest rates, borrowers will have to pay more in repayments which will negatively affect them
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how do interest rates affect savers?
savers will get more return if interest rates increase
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how does unemployment affect savers?
if they have signed up to a saving scheme where they make a monthly deposit and they become unemployed and are unable to keep this up, then they may lose some of the interest
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how does unemployment affect borrowers?
if someone is in debt and becomes unemployed then they won't be able to make the repayments as they have no income. people with PPI will at least be in a better position as their loan payments will be covered
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Other cards in this set

Card 2

Front

how is the amount of risk faced by someone calculated?

Back

by looking at the joint effect of the probability of the risk happening and at the impact and severity of the risk if it does occur

Card 3

Front

what are the 3 factors which affect where someone stands on the spectrum of willingness to take risks?

Back

Preview of the front of card 3

Card 4

Front

why is willingness to take risks linked to stages in the personal life cycle?

Back

Preview of the front of card 4

Card 5

Front

what is self insurance?

Back

Preview of the front of card 5
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