IOC Introduction to Investments Economic Environment

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What is a state economy?
The state decides what is produced and how it is distributed.
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What are state economys sometimes refered to as and why?
Planned Economys because the production and alloctation of resourcs is planned in advance rather than being able to respond to market forces
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What can careful planning and control bring?
Excessive layers of beurocary and state control removes a great deal of choice
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What is a Market Economy?
The forces of supply and demand determine how resources are allocated
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Interaction of demand from consumers and supply from business in the market will determine______
The Market clearing price
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What does the market clearing price reflect?
What the consumers are willing to pay and the price suppliers are willing to accept
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What would happen to the price if there is oversupply?
The price will be low
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What would happen to the producers if there is oversupply?
Some producers will leave the market
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What happends to the price if there is over supply?
The price would be high
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What happends to the producers if the price is high?
More producers would be attracted to the market.
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Name the three markets within a Market Economy?
Goods , services and productive assets
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What does productive assets include?
Productive assets include capital goods (eg Machinary), labour and money.
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What in the labour market is the "price"?
The wage
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What do people and businesses compete for in a Market Economy?
Jobs and Customers
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What type of value will scares resources have?
High value
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In a Market econemy what does competiton mean?
Inferior employees and and shares in unsuccessful companies will be much cheaper
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What could competition do to an unsuccessful company?
Cause it to collapse and people searching for new jobs
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What is a mixed economy?
Combines Market economy with some elements of state control.
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What do the government provide in a mixed economy?
A welfare system to support
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What will government spend money on?
Defence, education, public transport, health and public services
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How to government raise their finances within a mixed economy?
Collecting taxes from wage-earners and companies, VAT on petrol , cigerettes and borrowing in the capital market
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What group is one of the largest groups in labour market?
Civil Servants
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Within the UK who raises money for the treasury?
Civil servants
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What is an open economy?
There are few barriers to trade or controls over foreign exchange
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What could happen if a country believes another coutry is taking unfair advantage?
Apply retaliatory action such as sanctions
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What is protectionism?
A country prevents other countries from trading freely in order to preserve its domestic market
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What are the names of the policies that attempt to reduce fluctuations in economic activity?
Stabillisation Policies
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What does the Fiscal policy involve?
Involves making adjustments using government spending and taxations
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What is monetary policy?
Involves making adjustments to interest rates and money supply.
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What is a Central bank?
It operates at the centre of a nation's fiancial system.
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What are some of the responsibilities of central bank?
Actin as banker to the government, manaing the national debt, controlling the money supply, issuing notes and counts
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What is the Central bank of the United Kingdom?
The Bank Of England
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What acts as the governments banker and the banking system?
The Bank Of England
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As well as making services to its customers who else does the Bank of Engalnd Manage?
Uk's foreign exchange and gold reserves
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What are the Bank of Engalnds two core purpsoes?
Monetary stability and financial stability
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What is Monetary stability?
Means stable prices and confidence in the currcy.
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What is financial Stability?
Refers to detecting and reducing threats to the financail system as a whole.
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Who takes on the Interest Rate decisions?
The Bank's Monetary Policy Committee.
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What is the Monetary Policy Committee role?
Ensure that inflation is kept within a government-set range, set each year by the chancellor of the Exchequer.
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How does the Monetary Policy Committee ensure that inflation is within a governemnt set range?
By setting the base rate.
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What must the Monetary Policy Committee guage in there meetings?
All factors thatcan influence inflation over both the short and medium term.
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List 5 factors that must be gauaged in the Monetary policy Committee?
Exchange rate, the rate at which the economy is growing, how much consumers are borrowing and sope
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When setting the basic rate what have you go to be mindful of?
Sustainability of economic growth and employment in the UK and the time lag between a change in rate and effects it will have on the economy
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What is quantitative easing?
Central bank creating money, which it then uses to buy assets such as government bonds and high-quality debts
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Whats the first step of does creating money ?
Central banks buys assets from private sector institutions and credits the seller's bank account
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What is the Second step of creating money?
the seller has money in their bank account so the seller has more money in their account while the central bank holds assets as parts of its reserve
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What is the end result of creating money?
More money out in the wider econemy
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What effects doe injecting more money into the economy through bonds have?
Sellers of bonds have more money so may spend it which boost growth, Banks find themselves holding more reserves which may lead them to boost their lending to consumers and business again, borrowing increases and so does spending.
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What is the overall theory of injecting money into the economy?
Extra money works its way through the economy resulting in higher spending and therefore growth or reducing the impact of recession and preventing the onset of a depression
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What is the purpose of preserving finanical stability?
To maintain the three vital functions which the finanical system performs in the economy
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What are the three vial functions which the finanical system performs in the economy?
Providing the main mechanism for pay goos, service and financial assets , Intermiating between savers and borrowers and channeling savings into investments via debt and equity instruments, insuring against and dispering risk
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What is the role of the Finanical Policy Committee?
The FPC is tasked with monitoring the stabilty and resilence of the UK Finanical system and using its powers to tackle those risk,.
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What are the other bank of England Responsibilities?
Managing national debt and providing depositors protection scheme for bank deposits
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How many regional banks are in the FED?
12 regional Federal Reserve banks
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What do the Federal Reserve banks do?
Monitors the activities of and provides liquidity to the banks in its region
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Who makes up Federal Open Market Committee?
Governing board, presidents of 5/12 Federal resrve banks
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What does the Chairmen of the FOMC do?
Take responsibility for the committees decisions
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What is the European Central Bank responsible for?
Setting monetary policy for the entire eurozone, with the objective of maintaining internal price stability.
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What is the Single Supervisory Mechism new framwork?
Banking supervisionin Eurpe and comprises the European Centreal Bank and National Supervisory authorities of participating Eu countires.
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What is the Single Supervisory Mechanisim aims?
Ensure the safety and soundess of the European banking system, increase financial integration and stabilityu in europe
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How is credit created?
Banks create monet and advance this to industry, consumers and government. The money circulates within the economy being spent on goods and services. Those it is paid to will then deposit it in their own bank accounts allowing banks to create credit
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What is inflation?
The persistent increase in the general level of prices
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Name two reason why prices increase?
Excess demand in the economy, scarcity of resources
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What percentage do western governemnts seek to control inflation at?
2-3% per annum
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Name some of the problems caused by high inflation?
Employees find the real value of their salaries eroded, business have to continually update the prices to keep pace with inflation, exports become less competitive
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What are the positive aspects of inflation?
Rising house prices, Value of borrower's debt falls , inflation erodes the real value of a countrys national debt
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What is deflation
A general fall in prive levels.
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How does deflation occur?
Negative demand shcoks e.g. fall in oil prices and from excess capcity and production. It creates a circle of reduced spending and reluncatnt
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What are the positives of deflation?
Rise in productitivity, greater price competition
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What is the Consumer Prices Index
measure of inflation that is produced in the standard way throughout the EU.
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What is excluded from the Consumer Prices Index
Mortagage interest costs
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What is the Retail prices Index?
measures the increase in general household spending
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What are the two distinct areas what are these?
Wholesale and retail sectors
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What activities make up the wholesale sector?
Equity , bonds, foreign exchnage, derivatives and insurance markets
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What does the retail sector focus on?
retail banking, insurance, pensions,investment services, financial planning and advice
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What is an Equity Market?
Finanical markets and facilitate thje trading in quoted comapnies
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What is the largest stock exchange in the world?
New York Sotck Exchange
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What is a Multilateral trading facility?
Systems that bring together muliple parties that are interest in buying and selling financial instruments.
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What is a retail bankn also known as?
High street bank
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What services to retail banks provide?
taking deposits from and lending fund to retail customers, providing payments and money transmisson services.
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Other than on the high street banking what else do they provide?
Internet and telephone banking
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What do larger retail banks often provide?
Penisons, investments and insurance
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What is a saving institution?
They started off by providing specialist saving producvts to retail customers
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What is another word for a saving institution?
Building Society
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How was a building society started?
A group of people got together and pool their savings allowing some members to build or buy houses.
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True or false Building societies are owned by the individuals who have deposited money or borrowed money from them?
True
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What are savings instituions often described as?
Mutual societies
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What is Demutalistion?
A piece of legislation was put in place allowing buidling societies to become companies
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Name one building society that didn't choose to become a company?
Nationwide
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What does an investment bank do?
Provides advice and arrange finance for companies that want to float on the stock market
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How do investment banks raise additional funds?
By issusing further bonds and shares or carry out mergers and acquisitions
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What services usually do investment banks offer?
Corporate fianance and advisory work, banking, investment management, treasury dealings and securitites trading
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What is Corporate Fiannce and Advisory work?
Normally in connection with new issues of securities for raising finance, takeovers, mergers and acquitions
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Who do investment banks carry out banking for?
Governemnts, institutions and companies
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What is treasury dealings?
For corporate clients in foreign currencies with financial engineering servivves to protect them from interest rate and exchange rates fluctuations
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What is securities trading?
Is in equitiies , bonds and derivatives and the provision of broking and distribiton facilities
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Describe pension funds?
Individuals can make provision for retirement using a variety of pension schemes from employer to self directed schemes.
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What do pension funds invest in?
shares, bonds, cash, property.
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What is one key function of an insurance company?
To provide a management of risk
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How do insurance companies help with protection planning?
They provide prpducts to meet many potential scenarios. E.g. Payment protection policies, mortgages, fleet insurance
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What do insurance companies collect in exchange for cover?
Premiums
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What are the premium income used to buy?
Investments such as shares and bonds
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When will an insurance company realise the investments/
When a claim arises on various policies
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What is a fund management?
Fund management is the professional management of investment portfolios for a variety of institutions and private sectors.
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What country is the largest centre of fund management in Europe?
The UK
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What are fund managers also known as?
investment or asset managers
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What is the role of a fund manager?
Run portfolios of investments for others. They invest money held by institutions and collective investment schemes e.g Unit Trusts.
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What are the two subdivides for investment managers who bvuy and shell sahres, bonds and other assets to increase the value of their clients?
Institutional and private client fund managers.
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What is an institution fund manager?
They work on behalf of institutions e.g. pension or insurance companies
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What is an private client fund manager?
Fund managers invest the money of relatively wealthy individuals.
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How are clients charged by fund mangers?
Based on a small percetnage of the value of the fund being managed
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What is a stockbrokers?
Arrange tradesin financial instruments on behalf of their client. May advise investors about what they should buy or only offer execution only services
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How do stockbrokers charge?
Charge fees for their advice and commissions on transactions. Also may charge to look after clients assets
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What is a custodian bank?
Bank that specialuise in safe custody services, looking after poltfolios of shares and bonds on behalf of others such as fund managers , pension funds
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What are the core actitivies custodian banks undertake?
Holding assets in saferkeeping, Arranging settlement of any purchases or sales of securities, managing cash transactions, processing corporate actions, performing foreign exchange transactions, providing regular reporting on all activites to clients.
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What as driven down the charges that a custodian can make for its custody services?
Competition
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The custody business is now dominated by a small nmumber of ________
Global custoduians
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What is a platform?
Platforms are online services used byu intermediaries such as indpenedent financial advisers to view and administor their clients investment portfolios
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What tools do platforms offer advisors?
Can see and alyse a clients overall portfolio and to choose product from them. Provide faciilities for investments to be bought and solf.
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What does the term platform refer to?
Both wraps and fund supermarkets.
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What is a fund supermarket?
Offer wide ranges of unit trusts and OEICS
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What is a wrap supermarket?
Offer greater access to other products such as Individual savings accounts, pension plans and insurance bonds.
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What do Wrap accoutn enable advisors to do?
Take a hollistic view of the various assets that a client has in a variety of accounts.
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What is a benefit of the advisor using a Wrap accoutn?
Simplifys and brings some level of automation to their back office using internet technology
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How do platforms make income?
By charging for their services
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What is an advantage of platforms for fund magament groups?
Is the ability of the platgforms to distribute their products to financial advisors
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What do Third Party Administrators do?
Undertake investment administrations on behalf of other firms and specialise in the area of the investment industry
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Why do more companies outsource?
Enables firms to focus on the cores areas of its businesses and fix its costs and leaves specialist firm to carry out the administrative functions processing more effiently and cost effectively
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What is the role of a trade and professional body?
To represent various industry sections and enables cross-frim development to take place to create an efficent market
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What is the Trade/Prfessional Body for Bonds?
International Capital MArket Association
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What is the Trade/Prfessional Body for Derivatives?
FIA Europe, internation swaps and Derivatives Association
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What is the Trade/Prfessional Body for Fund managers?
Investment Association
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What is the Trade/Prfessional Body for Insurance Companies?
Association of British Insurers
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What is the Trade/Prfessional Body for Private Client Investment Management?
Wealth Management Association
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What is the Trade/Prfessional Body for Banks?
British Bankers Association
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What is the Trade/Prfessional Body for Investment funds?
Tax incentivised Savings Association
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What is the role of a financial Advisor?
Offer advice on financial matters to their clients. Some recommened sutiable finanical products from the whole of the market and other from a norrower range.
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How does a financial advisor get the information needed to advise their client?
They will conduct a detailed survey of a client's financial position, prefrences and objectives.
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What is independent advice?
They genuinely do make recommendations basd on comprehensive and fair analysis of all products available in the market and provide unbiased, unresticted advice
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What is resricted advice?
A firm chooses to only given advice on its own range of products.
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Who monitors finanical acitvies of the financial advisors?
The Financial Conduct Authority
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When is execution only carried out?
If the customer asks to buy or sell aspecific investment product without having been prompted or advised by the firm..
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To ensure that firms operate within regulatory guidelines what evidence do they need?
That they gave no advice and made it slear at the ime of sale that it was not responsible for the product's suitability
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What is Robo-Advice?
Application of technology to the process of providing financial advice without the involvement of a financial advisor
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How does Robo-Advice Work?
Prospective investor enters data and fiancial information about themselvesand the system uses an algorithm to score the information and decide which investment should be chosen. Then presents the investment strategy.
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What is the investment stategy presented passively focused around?
Index funds or exchnage traded funds
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What approach is used in the Robo-advice?
Uses asset and risk model, construction of the risk targeted portfolios or funds to achieve a clients objectives then ongoing monitorityunf and rebalcing against those objectives
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What is Gross Domestic Product used for?
Measure a country's output. It measures economic actvity on an expenditure basis and is typically calculated quaterly
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What are the two distinct groups within an economy?
Individuals and firms
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What do the individuals do in an economy?
They supply firms with the productive resources of the economy in exchnage for an incrome. The indivudals use this income to buy the entire output produced by firms employing these resources. This gives rise to the circular flow of income
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What three ways can the economic activity be measured?
Total income paid by firms to individuals , individuals total expenditure on firm's output, value of total output generated by firms
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The rate of sustainable growth depends on ....?
Growth & productivity of labour force, rate the economy efficently channels its domestics savings and capital attracted from overseas into new & innovativs technology & replaces obsolescent capital equipment, economys infrastucture is maintained
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In a mutre econmy what rate does the labour force typically grow at?
1%
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What factors is long-term productivity growth dependant on?
Education, training and utilisation of labour-saving new technology.
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What will happen to the actual output when the economy is growing in excess of its trend growth rate?
Will exceed potiential output and often with inflationary consequences
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What is a country's output contracts?
When its economic growth rate turns negative for atleast two consecutive calendar quaters the economy is saidto be in a recession
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Whatis balance of payements?
A summary of all the transactions between the UK and the rest of the world
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What happeneds if the UK imports more thanit exports?
There is a balance of payment deficit
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What happens if the UK exports more than it imports?
There is a balance of payment surplus
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What are the compnents of the balance of payemnts?
Trade balance, the current account and the capital account
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How is the trade blance caluclated?
A visable trade balance - the difference between the value of imported and exported goods
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What is the invisable trade balance?
difference between of imported and exported services
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If a country has a trade deficit what does this mea?
In one of these areas or services they import more than they export
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If the UK has trade surplus what does this mean?
It ecports more than it imports
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Why is a current account used in the balance of payments?
It is used to calculate the total value of goods and services that flow into and out of a county.
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What is comprises within the current account?
The trade balance figures from the visable and invisibles. Also added to these are receipts such as dividends from overseas assets and remittance from national working abroad
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What do the results of a current account provide?
Details of the balamnce of trade a country has with the rest of the world.
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How does the UK typically run with visable and invisable trade?
The UKK runs a deficit of visbible trade but an invisable trade surplus. Also because it is an open economy imports and exports combined total over 50% of UK GDP
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What does the capital account record?
International capital transactions related to investment in business, real estate, bonds and stocks. Also includes tranascations relating to fixed assets, purchase & sale of domestic and foreign investment assets
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How do you get the balance of payemnts to balance?
Current account must equal the capital account +/- a balancing item used to rectify the many errors in compling the balance of payments +/- any change in central foreign currency reservces
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If there is a current account deficiet resulting from a country being a net importer of overseas goods an services what must it be met by?
A net inflow of capital from overseas taking into account of any measurement errors and any central bank intervention in foreign exchange rate alters.
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Why is having the right exchange rate important?
It levels the international trade undertaken to a countrys international competitivemness and its economic position.
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If the value of a country's currency rises what will happen the exports and imports?
It will be less competitive, ubless producers reduce their prices and imports will be cheaper therefore more competitive
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What would the country'** result be in relation to the currency rise?
Reduce trade surplus or worsen the trade deficit
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If the value falls against other currencies what would happen?
Exports will be cheaper in foriegn market and therefore more competitive and imports will be more expensive and less competitive. A trade surplus or deficit will see an improving position.
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What is government debt?
This is what the government owes
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What is the government deficit?
The shortfall between what the government receives in tax receipts and what its spends.
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What is the government debt also refered to as?
The public sector net debt
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What is the government deficit also known as?
Public sector net cash requirement
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How are debt measures usually presented?
As a percentange of the GDP however we know need to allow for effects such as inflation so we divide by GDP/
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How is the Pubic sector net cash requirements calculated?
The diffence between government expenditure and government income.
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What will happen in a buoyant economy?
government spending is less that incomne with substantial tax revenue generated from corporate profits and high levels of employment. Enabling the government to reduce public sector borrowing
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What happens in a slowing economy?
Government spending tends to exceed tax revenues and the government will need to raise borrowing by issuing government bonds.
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Is the UK in a slowing or buoyant economy and why?
A slowing economy because governm,ent deficit exploded due to the reccsion reduce tax receipts & pushed up spending on unemployment benefits. If left unaddressed high levels of public borrowing & debt risk undermining growth & economic stabilty
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What could happen to inflation if the excessive government spending causes a ggrowing public sector net cash requirement?
It will rise.
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What do high levels of unemployment indicate in the economy?
Low demand in the economy for goods and sercies produced and sold to consumers therefore low demand for UK people to provide them
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What impact will high unemployement have on the government?
Negative impact on government's finances as they will need to increase social security payments, and its income will drecrease because of the lack of tax revenuye from unemployed
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What are the main characteristics of cash depostis?
Return simply comprises inteerest income with no potiential capital growth, amount invested is repaid in full as the end pf the investment term or when withdrawn
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What is instant access account?
The money can be withdraw anytime e.g instant access ISA's
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What is a fixed term account?
Fixed for one year or more, or requires notice to be given before monies can be withdrawn
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What would the interest be like on a larger deposit?
The will ary because of comeptition however they usually receive a better rate
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What happened to the interest generated?
It is liable to income tax which is now paid ggross to investors
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In April 2016 there was a new personal savings allowance what did this mean in terms of removing the tax?
The bank will remove tax on up to £1,00 of savings income for basic rate payers and up to £500 for higher rate taxpayers.
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Do non-taxpayers have to claim back their tax on savings?
No there is no need for them to apply for a rebate
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What are the advantages of investing in cash?
liquidity ease and speed which an investment can be turned into cash to meet spending needs., like a savings vehicle and for the interest return earned on them, safer investments not exposes to market volatility.
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What are the disadvantages of investing in cash?
Deposit-taking institutions & risk they might default needs to be taken into account, Inflation reduces the level of reurn , currency risk & different regulatory regimes where funds are invested offshore or in different country, interest rates vary
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What is a money market?
Wholesale or institutional markets for cash and are characterised by the issue, trading and redemption of short-dated negotiable securites.
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What is a capital market?
Long-term providers of finance for companies through investment either in bonds or shares
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Owing to the short- term nature of money markets how are most instruments issued?
Bearer form and at a discount to their face value in orderto save on adminstration associated with registration and payment of interest
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Why are money markets investments more suitable for institutional investors?
is oftens sujubect to relatively high minimum subscription
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What do both cash deposits and money market instrument provide?
A low risk way to generate an income or capital return while preserving the nominal value of the amount invested.
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Can money markets and cash deposits be used long-term/medium term and why?
No because they have underperformed most other asset types and cash deposits have barley been positive once inflation and tax are taken off
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What is a Treasury Bill?
they are issued weekly by the debt management office on behalf of the treasury. The money is used for the governments short-term borrowing needs
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What is a certificate of deposit?
Issued by banks in return for deposited money you could think of them as tradable deposit accounts as they can be brought and sold similar to shares.
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What is commerical paper?
Corporate equivalent of a treasury bill. Issued by large companies to meet their short term borrowing needs.
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Who agrees whether a company can issue a commercial paper?
A bank
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What is a money market fund?
Is used by banks and companies to manage their liquidity need.
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Are money market funds accessible by private investors?
No
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What is an advantage of money market funds?
The pooling of funds with other investors gives the investor access to assets around the world which they could not of been invested in.
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Is the return greater in money market accounts or money market accounts?
Money market accounts
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What is the highest rating offered by a credit rating agency?
AAA
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What does it mean if money is placed in a money market account?
They are exposed to the risk of the bank, however they will invest in a range of instruments from many providers as long as they are AAA rated they can offer high levels of security
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What were the two money market funds introduced are based on?
The European definations of money market funds that have been adopted by FCA short-term money market funds and money market funds
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What are short term money market funds?
cam have a constant or a fluctuating net asset value. A constant NAV face value means they should have an unchanging net asset value when income of funds are acrruded daily can be paid out.
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What is the volatility of a Money Market fund like?
Flucatuting net asset value
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Where else can Money market funds invest in?
Instruments in which capital is at risk and may not be suitable for many investors & denominated in other currencies and so introduced exchange rate risk.
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Other cards in this set

Card 2

Front

What are state economys sometimes refered to as and why?

Back

Planned Economys because the production and alloctation of resourcs is planned in advance rather than being able to respond to market forces

Card 3

Front

What can careful planning and control bring?

Back

Preview of the front of card 3

Card 4

Front

What is a Market Economy?

Back

Preview of the front of card 4

Card 5

Front

Interaction of demand from consumers and supply from business in the market will determine______

Back

Preview of the front of card 5
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