Chapter 4

Q.3. What risks do investment products pose for the institutions that sell them?
How might these risks be minimized or controlled?
There are several risks involved in the sale of products. The value of these pr
oducts is market driven and customers may blame the IB when they do not reach th
eir earnings goals. Because of their reputation, customers may hold investment
institutions to a higher standard than securities brokerage houses.
Customers must be told that these products are subject to risks including potent
ial loss of principal.
Customers must sign a document stating they were informed of these risks.
Finally, they must demonstrate that they are regularly monitoring themselves to
ensure that their sales personnel are complying with the regulatory requirements
. Compliance with these regulations should help minimize the risks inherent in t
hese products
Q.5. Define 'Mutual Fund
An investment vehicle that is made up of a pool of funds collected from many inve
stors for the purpose of investing in securities such as stocks, bonds, money mark
et instruments and similar assets.
Mutual funds are operated by money managers, who invest the fund's capital and at
tempt to produce capital gains and income for the fund's investors.
A mutual fund's portfolio is structured and maintained to match the investment o
bjectives stated in its prospectus.
Q.6. What are Hedge Funds ?
Hedge funds (unlike mutual funds) are unregulated because they cater to sophisti
cated investors, they must earn a minimum amount of money annually and have a ne
t worth of more than $1 million, along with a significant amount of investment k
nowledge.
Hedge funds are as mutual funds for the super rich. They are similar to mutual f
unds in that investments are pooled and professionally managed, but differ in th
at the fund has far more flexibility in its investment strategies.
It is important to note that hedging is actually the practice of attempting to r
educe risk, but the goal of most hedge funds is to maximize return on investment
.
In fact, because hedge fund managers make speculative investments, these funds c
an carry more risk than the overall market.
Q.7. Define 'Insurance'
A contract (policy) in which an individual or entity receives financial protectio
n or reimbursement against losses from an insurance company.
The company pools clients' risks to make payments more affordable for the insured.
The payment made is called premium.
The insurance companies offer mostly the same products. The main products offere
d are life insurance, health and casualty insurance, property insurance and vehi
cle insurance.
Q.8. What are building societies? What are their sources and uses of funds?

They are authorized deposit-taking institutions (AIDs) working as alternative to

banks for users of financial products. Building societies directly compete with
banks for both retail and business clients, providing mainly mortgage finance f
or owner occupied housing.
The main source of income for building societies is interest income. This is ear
ned from deposits with financial institutions, interest from investment securiti
es but mainly from interest on loans and advances made to the clients.
The uses of their funds are cost of financing their loan portfolios, income tax,
bad debts expense , personnel costs, depreciation of property, plant and equipm
ent and other administration costs.
Chapter 5
Q.2. List the advantages and disadvantages of credit?
Advantages of Credit
Buy now pay later?
Safety - travel without large amounts of cash
Float
Rebates and rewards
Proper use of credit enhances your trustworthiness
Disadvantages of Credit
Temptation to overspend
Risk of loss of reputation, income, property,...
Does not increase overall purchasing power
Credit costs money
1) Character and Credit History: Never been a defaulter, Pay bills on time? How l
ong has he had the present job? Lenders will review your credit history to find o
ut whether you have used credit responsibly in the past.When lenders evaluate ch
aracter, they look at stability
for example, how long you ve lived at your current
address, how long you ve been in your current job, and whether you have a good re
cord of paying your bills on time and in full. If you want a loan for your busin
ess, the lender may consider your experience and track record in your business a
nd industry to evaluate how trustworthy you are to repay.
2) Capacity: To repay the loan. Capacity refers to considering your other debts
and expenses when determining your ability to repay the loan. Creditors evaluat
e your debt-to-income ratio, that is, how much you owe compared to how much you
earn. The lower your ratio, the more confident creditors will be in your capacit
y to repay the money you borrow
3) Capital: What are your assets and net worth? Capital refers to your net wort
h the value of your assets minus your liabilities. In simple terms, how much you
own (for example, car, real estate, cash, and investments) minus how much you o
we.
4) Collateral: Value of security pledged or mortgaged. Collateral refers to any
asset of a borrower (for example, a home) that a lender has a right to take own
ership of and use to pay the debt if the borrower is unable to make the loan pay
ments as agreed. Some lenders may require a guarantee in addition to collateral.
A guarantee means that another person signs a document promising to repay the l
oan if you can t.
5) Conditions: Refer to the intended purpose of the loan. Lenders consider a nu
mber of outside circumstances that may affect the borrower s financial situation a
nd ability to repay, for example what s happening in the local economy. If the bor
rower is a business, the lender may evaluate the financial health of the borrowe
r s industry, their local market, and competition.

Credit rating: a measure of a person's ability and willingness to make credit pa

yments on time (score system)
Fair Isaac Corporation (FICO) scores generally range from350 to 850
Q.5. Sam has net monthly income of $3,400. She has a monthly auto loan payment o
f $500, a student loan payment of $150, and a credit card minimum payment of $50
. What is his debt-payments-toincome ratio?
Debt-payments-to-income ratio = total liabilities / net worth
(500+150+50)/3400 = 20.58%
Q.7. Sam received a $2,000 loan from the bank for a vacation. The bank is using
the simple interest formula for this one-year, 8 percent loan. What is her total
interest?
I = P x r x T
= $2,000 x .08 x 1 year = $160
Total payment: 160+2000=$2160
If paid in two installments:
First payment:
I=2000x.08x1/2=$80
=80+1000=1080
Second payment:
I=1000x.08x1/2=$40
=40+1000=1040
Total payment: 1080+1040=$2120