other markets and investments chp 5
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Questions and Answers

What is a key characteristic of cash deposits?

  • Guaranteed full repayment of the capital (correct)
  • Potential for capital growth
  • Variable return outcomes
  • Possibility of losing the capital

    • Which types of deposit accounts allow immediate withdrawal of funds?

  • Cryptocurrency accounts
  • Fixed-term accounts
  • Accounts with notice requirements
  • Instant access accounts (correct)

    • What determines the interest rate paid on cash deposits?

  • Account holder's credit score
  • Size of the deposit and investment term (correct)
  • Type of financial institution holding the deposit
  • Time required to withdraw funds

    • Which of the following is true about large deposits in cash accounts?

    <p>They earn lower interest rates due to processing costs</p> Signup and view all the answers

    What differentiates cash deposits from other investments like equities and bonds?

    <p>Interest income as the only return component</p> Signup and view all the answers

    Why do some cash deposit accounts require notice before withdrawing funds?

    <p>To prevent account holders from withdrawing their funds</p> Signup and view all the answers

    Which of the following is a drawback of investing in cash deposits?

    <p>Negative after-tax return due to inflation</p> Signup and view all the answers

    What is a potential risk associated with depositing cash overseas?

    <p>Lack of protection under a depositors' protection scheme</p> Signup and view all the answers

    Which factor does NOT contribute to the safety of cash investments?

    <p>Fixed interest rates</p> Signup and view all the answers

    What characteristic distinguishes cryptocurrency from fiat money?

    <p>Decentralized network without central authority</p> Signup and view all the answers

    Which type of cryptoassets provides access to services and products?

    <p>Utility tokens</p> Signup and view all the answers

    What key feature does Bitcoin utilize to create a decentralized network?

    <p>Blockchain technology</p> Signup and view all the answers

    'Fiat currency' refers to money that:

    <p>Cannot be converted into gold or any other type of asset</p> Signup and view all the answers

    What role did goldsmiths play in the history of money?

    <p>Storing gold coins for customers and issuing receipts</p> Signup and view all the answers

    Why did people start using goldsmiths' receipts for making payments?

    <p>To transact without withdrawing physical gold</p> Signup and view all the answers

    What was the consequence of people using goldsmiths' receipts for transactions?

    <p>Transition from gold-backed to fiat currency systems</p> Signup and view all the answers

    What term is used to describe money that is no longer convertible into gold or any other asset?

    <p>Fiat money</p> Signup and view all the answers

    Which function of money involves using it as a way to measure the value of an item for sale?

    <p>Unit of account</p> Signup and view all the answers

    Why are cryptocurrencies not widely regarded as money for legal or regulatory purposes?

    <p>They are too volatile.</p> Signup and view all the answers

    What is the distinguishing feature of Treasury bills that makes them different from other types of money market instruments?

    <p>They are zero coupon instruments.</p> Signup and view all the answers

    Which type of money market instrument is issued by banks in return for deposited funds and can be traded like shares?

    <p>Certificates of deposit</p> Signup and view all the answers

    What is the main reason for issuing money market instruments at a discount to their face value?

    <p>To simplify administration processes</p> Signup and view all the answers

    Which party typically finds direct investment in money market instruments more suitable?

    <p>Institutional investors</p> Signup and view all the answers

    'Zero coupon' instruments refer to financial products that:

    <p>'Do not pay any interest during their tenure.'</p> Signup and view all the answers

    What is one of the reasons for the variation in interest rates on deposits?

    <p>Competition between deposit-taking institutions</p> Signup and view all the answers

    Why do large deposits typically earn a better rate than smaller ones?

    <p>They are easier for a bank to process</p> Signup and view all the answers

    What is the key difference between fixed-term deposit accounts and instant access deposit accounts?

    <p>Higher interest rates on fixed-term accounts</p> Signup and view all the answers

    What is the impact of Islamic financial principles on savings accounts?

    <p>Avoidance of paying or receiving interest</p> Signup and view all the answers

    What is the purpose of advertising an expected profit rate for Islamic banking accounts?

    <p>To communicate the percentage return banks expect to pay</p> Signup and view all the answers

    Why do many non-Muslims find Islamic banking accounts appealing?

    <p>Because of the ethical guidelines followed</p> Signup and view all the answers

    What is the primary reason for holding cash deposits according to the text?

    <p>For liquidity needs and emergencies</p> Signup and view all the answers

    What happens if the profit rate decreases in an Islamic banking account?

    <p>Depositors can choose to continue at the new lower rate or withdraw their deposit</p> Signup and view all the answers

    What is gross interest in terms of deposit-takers quoting rates?

    <p>The headline rate before tax deduction</p> Signup and view all the answers

    What is one significant impact of monetary policy on interest rates according to the text?

    <p>Bringing down base rates to zero</p> Signup and view all the answers

    What is a key reason why only the largest investors tend to invest in commercial property?

    <p>Small investors lack the capital required for direct investment in commercial property.</p> Signup and view all the answers

    Why do private investors often choose to become involved in the property market through buy-to-let investments or second home purchases?

    <p>To diversify their investment portfolios in a tangible asset class.</p> Signup and view all the answers

    In what aspect do residential and commercial properties significantly differ as highlighted in the text?

    <p>Tenant responsibilities for repairs</p> Signup and view all the answers

    What makes commercial property more suitable as an investment for long-term investing institutions compared to residential property?

    <p>Long-term contracts and steady rental income</p> Signup and view all the answers

    Why do property funds sometimes impose moratoriums on encashments during downturns, as mentioned in the text?

    <p>To stabilize the fund by limiting outflows during a crisis.</p> Signup and view all the answers

    What role do mutual funds and property bonds play in allowing investors indirect exposure to the property market?

    <p>They provide liquidity and ease of investment in the property market.</p> Signup and view all the answers

    What type of marketable instrument is a Certificate of Deposit (CD)?

    <p>Short-term instrument with a fixed interest rate</p> Signup and view all the answers

    How are Commercial Papers (CP) usually issued?

    <p>At a discount to their par value</p> Signup and view all the answers

    What does it mean for money market instruments to be bearer instruments?

    <p>Ownership is demonstrated by holding the physical instruments</p> Signup and view all the answers

    How do money market funds differ from money market accounts?

    <p>Funds are covered by depositor protection schemes, while accounts are not</p> Signup and view all the answers

    Why are cash deposits considered unsuitable for the long term?

    <p>Returns from cash deposits are usually negative after taxation</p> Signup and view all the answers

    What role do money market investments play in a client's portfolio?

    <p>Serve as a temporary home for cash balances in uncertain times</p> Signup and view all the answers

    How are money market deposit accounts described in the text?

    <p>As essentially savings accounts with certain requirements</p> Signup and view all the answers

    Why do money market funds tend to offer higher returns compared to money market deposit accounts?

    <p>As they pool funds giving access to better assets and returns</p> Signup and view all the answers

    'Ownership is simply evidenced by holding the instruments' implies that:

    <p>'Physical possession signifies ownership of the instruments'</p> Signup and view all the answers

    'CDs were introduced which could be traded on a secondary market.' indicates that CDs:

    <p>'Can be traded once issued'</p> Signup and view all the answers

    What is a distinguishing feature of property investment compared to other asset classes?

    <p>Property is unique in terms of location, structure, and design</p> Signup and view all the answers

    Why is diversification difficult in property investment?

    <p>Property can only be purchased in large, discrete units</p> Signup and view all the answers

    What risk do money market funds introduce due to their investments?

    <p>Currency risk as they invest in assets denominated in multiple currencies</p> Signup and view all the answers

    How are money market funds different from money market accounts offered by banks?

    <p>Money market funds invest in a range of instruments from multiple providers</p> Signup and view all the answers

    Why might an investor choose a money market fund over a money market account?

    <p>To have limited exposure to market risk</p> Signup and view all the answers

    What does the AAA rating signify for money market instruments?

    <p>It represents the highest credit rating</p> Signup and view all the answers

    In what situation might an investor consider placing funds in money markets?

    <p>At the peak of a long bull market cycle</p> Signup and view all the answers

    Why are money market funds considered an alternative investment?

    <p>Because of their minimal exposure to any appreciable market risk</p> Signup and view all the answers

    What provides protection against appreciable market risk in money market instruments?

    <p>The short-term fluctuation in interest rates</p> Signup and view all the answers

    What historical event led to the replacement of the gold standard by the Bretton Woods Agreement?

    <p>Great Depression</p> Signup and view all the answers

    What was a key restriction imposed under the Bretton Woods Agreement to prevent currency devaluation?

    <p>Capping currency devaluation to 10%</p> Signup and view all the answers

    What led to the eventual abandonment of the Bretton Woods Agreement in the 1970s?

    <p>Pressure for capital movement</p> Signup and view all the answers

    What major change occurred in currency markets after the Bretton Woods Agreement was abandoned?

    <p>Currencies allowed to float against each other</p> Signup and view all the answers

    What development arose as a result of currencies floating freely against each other?

    <p>24-hour currency trading</p> Signup and view all the answers

    What is the purpose of a forward exchange contract?

    <p>To buy or sell foreign currency at a fixed rate for settlement at a future date</p> Signup and view all the answers

    What determines the relationship between spot exchange rates and forward exchange rates according to the text?

    <p>Differential between nominal interest rates</p> Signup and view all the answers

    Why does the text mention converting interest rates into decimals?

    <p>To simplify the calculation process</p> Signup and view all the answers

    How are the three-month interest rates in the UK and US adjusted for calculation in the example given?

    <p>Divided by 4</p> Signup and view all the answers

    Why would the forward rate be lower if US interest rates were lower than UK interest rates?

    <p>To make investors indifferent to interest rate differentials</p> Signup and view all the answers

    What is the logic behind the theory of interest rate parity as explained in the text?

    <p>'Relative purchasing power' theorem</p> Signup and view all the answers

    In the context of forward exchange rates, why should investors be indifferent to interest rates available on bank deposits?

    <p>To eliminate arbitrage opportunities</p> Signup and view all the answers

    How do forward exchange rates help in ensuring investor indifference to interest rate differentials?

    <p>By maintaining constant spot rates</p> Signup and view all the answers

    What is the key factor influencing whether a forward rate is higher or lower than the spot rate according to the text?

    <p>Interest rate differentials between countries</p> Signup and view all the answers

    Why does the text mention that investors should be indifferent to interest rate differentials?

    <p>To prevent excessive capital outflows from countries with high-interest rates</p> Signup and view all the answers

    In the forex market, when would the base currency be considered strengthening relative to the counter currency?

    <p>When the exchange rate is going up</p> Signup and view all the answers

    What does a bid-ask price quote in a currency pair represent in the forex market?

    <p>The midpoint of the buying and selling prices</p> Signup and view all the answers

    What is the standard convention for quoting currency pairs in the forex market?

    <p>Abbreviating both currencies to three-letter codes</p> Signup and view all the answers

    What does it mean when a forward transaction in the FX market is agreed upon for a fixed sum of money at a future date?

    <p>The exchange rate is locked at the time of agreement</p> Signup and view all the answers

    Which of the following is NOT a type of transaction typically undertaken in the FX market?

    <p>Repo agreements</p> Signup and view all the answers

    What role do central banks play in foreign exchange markets?

    <p>Using FX markets for controlling money supply</p> Signup and view all the answers

    Why are foreign currency futures considered standardized versions of forward transactions?

    <p>They have fixed maturity dates and set contract sizes</p> Signup and view all the answers

    'Settlement through CLS Bank or international banking system' implies what about FX transactions?

    <p>'T+2' refers to waiting 2 days for actual currency delivery</p> Signup and view all the answers

    'Large international banks provide bid and ask prices' - Why do banks play this role in FX markets?

    <p>'Bid' and 'Ask' prices ensure market liquidity</p> Signup and view all the answers

    'Currency swaps are negotiated individually' - How does this differ from exchange-traded contracts?

    <p>'Currency swaps' have flexible terms tailored to parties' needs</p> Signup and view all the answers

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