84 Questions
What is a key characteristic of cash deposits?
Guaranteed full repayment of the capital
Which types of deposit accounts allow immediate withdrawal of funds?
Instant access accounts
What determines the interest rate paid on cash deposits?
Size of the deposit and investment term
Which of the following is true about large deposits in cash accounts?
They earn lower interest rates due to processing costs
What differentiates cash deposits from other investments like equities and bonds?
Interest income as the only return component
Why do some cash deposit accounts require notice before withdrawing funds?
To prevent account holders from withdrawing their funds
Which of the following is a drawback of investing in cash deposits?
Negative after-tax return due to inflation
What is a potential risk associated with depositing cash overseas?
Lack of protection under a depositors' protection scheme
Which factor does NOT contribute to the safety of cash investments?
Fixed interest rates
What characteristic distinguishes cryptocurrency from fiat money?
Decentralized network without central authority
Which type of cryptoassets provides access to services and products?
Utility tokens
What key feature does Bitcoin utilize to create a decentralized network?
Blockchain technology
'Fiat currency' refers to money that:
Cannot be converted into gold or any other type of asset
What role did goldsmiths play in the history of money?
Storing gold coins for customers and issuing receipts
Why did people start using goldsmiths' receipts for making payments?
To transact without withdrawing physical gold
What was the consequence of people using goldsmiths' receipts for transactions?
Transition from gold-backed to fiat currency systems
What term is used to describe money that is no longer convertible into gold or any other asset?
Fiat money
Which function of money involves using it as a way to measure the value of an item for sale?
Unit of account
Why are cryptocurrencies not widely regarded as money for legal or regulatory purposes?
They are too volatile.
What is the distinguishing feature of Treasury bills that makes them different from other types of money market instruments?
They are zero coupon instruments.
Which type of money market instrument is issued by banks in return for deposited funds and can be traded like shares?
Certificates of deposit
What is the main reason for issuing money market instruments at a discount to their face value?
To simplify administration processes
Which party typically finds direct investment in money market instruments more suitable?
Institutional investors
'Zero coupon' instruments refer to financial products that:
'Do not pay any interest during their tenure.'
What is one of the reasons for the variation in interest rates on deposits?
Competition between deposit-taking institutions
Why do large deposits typically earn a better rate than smaller ones?
They are easier for a bank to process
What is the key difference between fixed-term deposit accounts and instant access deposit accounts?
Higher interest rates on fixed-term accounts
What is the impact of Islamic financial principles on savings accounts?
Avoidance of paying or receiving interest
What is the purpose of advertising an expected profit rate for Islamic banking accounts?
To communicate the percentage return banks expect to pay
Why do many non-Muslims find Islamic banking accounts appealing?
Because of the ethical guidelines followed
What is the primary reason for holding cash deposits according to the text?
For liquidity needs and emergencies
What happens if the profit rate decreases in an Islamic banking account?
Depositors can choose to continue at the new lower rate or withdraw their deposit
What is gross interest in terms of deposit-takers quoting rates?
The headline rate before tax deduction
What is one significant impact of monetary policy on interest rates according to the text?
Bringing down base rates to zero
What is a key reason why only the largest investors tend to invest in commercial property?
Small investors lack the capital required for direct investment in commercial property.
Why do private investors often choose to become involved in the property market through buy-to-let investments or second home purchases?
To diversify their investment portfolios in a tangible asset class.
In what aspect do residential and commercial properties significantly differ as highlighted in the text?
Tenant responsibilities for repairs
What makes commercial property more suitable as an investment for long-term investing institutions compared to residential property?
Long-term contracts and steady rental income
Why do property funds sometimes impose moratoriums on encashments during downturns, as mentioned in the text?
To stabilize the fund by limiting outflows during a crisis.
What role do mutual funds and property bonds play in allowing investors indirect exposure to the property market?
They provide liquidity and ease of investment in the property market.
What type of marketable instrument is a Certificate of Deposit (CD)?
Short-term instrument with a fixed interest rate
How are Commercial Papers (CP) usually issued?
At a discount to their par value
What does it mean for money market instruments to be bearer instruments?
Ownership is demonstrated by holding the physical instruments
How do money market funds differ from money market accounts?
Funds are covered by depositor protection schemes, while accounts are not
Why are cash deposits considered unsuitable for the long term?
Returns from cash deposits are usually negative after taxation
What role do money market investments play in a client's portfolio?
Serve as a temporary home for cash balances in uncertain times
How are money market deposit accounts described in the text?
As essentially savings accounts with certain requirements
Why do money market funds tend to offer higher returns compared to money market deposit accounts?
As they pool funds giving access to better assets and returns
'Ownership is simply evidenced by holding the instruments' implies that:
'Physical possession signifies ownership of the instruments'
'CDs were introduced which could be traded on a secondary market.' indicates that CDs:
'Can be traded once issued'
What is a distinguishing feature of property investment compared to other asset classes?
Property is unique in terms of location, structure, and design
Why is diversification difficult in property investment?
Property can only be purchased in large, discrete units
What risk do money market funds introduce due to their investments?
Currency risk as they invest in assets denominated in multiple currencies
How are money market funds different from money market accounts offered by banks?
Money market funds invest in a range of instruments from multiple providers
Why might an investor choose a money market fund over a money market account?
To have limited exposure to market risk
What does the AAA rating signify for money market instruments?
It represents the highest credit rating
In what situation might an investor consider placing funds in money markets?
At the peak of a long bull market cycle
Why are money market funds considered an alternative investment?
Because of their minimal exposure to any appreciable market risk
What provides protection against appreciable market risk in money market instruments?
The short-term fluctuation in interest rates
What historical event led to the replacement of the gold standard by the Bretton Woods Agreement?
Great Depression
What was a key restriction imposed under the Bretton Woods Agreement to prevent currency devaluation?
Capping currency devaluation to 10%
What led to the eventual abandonment of the Bretton Woods Agreement in the 1970s?
Pressure for capital movement
What major change occurred in currency markets after the Bretton Woods Agreement was abandoned?
Currencies allowed to float against each other
What development arose as a result of currencies floating freely against each other?
24-hour currency trading
What is the purpose of a forward exchange contract?
To buy or sell foreign currency at a fixed rate for settlement at a future date
What determines the relationship between spot exchange rates and forward exchange rates according to the text?
Differential between nominal interest rates
Why does the text mention converting interest rates into decimals?
To simplify the calculation process
How are the three-month interest rates in the UK and US adjusted for calculation in the example given?
Divided by 4
Why would the forward rate be lower if US interest rates were lower than UK interest rates?
To make investors indifferent to interest rate differentials
What is the logic behind the theory of interest rate parity as explained in the text?
'Relative purchasing power' theorem
In the context of forward exchange rates, why should investors be indifferent to interest rates available on bank deposits?
To eliminate arbitrage opportunities
How do forward exchange rates help in ensuring investor indifference to interest rate differentials?
By maintaining constant spot rates
What is the key factor influencing whether a forward rate is higher or lower than the spot rate according to the text?
Interest rate differentials between countries
Why does the text mention that investors should be indifferent to interest rate differentials?
To prevent excessive capital outflows from countries with high-interest rates
In the forex market, when would the base currency be considered strengthening relative to the counter currency?
When the exchange rate is going up
What does a bid-ask price quote in a currency pair represent in the forex market?
The midpoint of the buying and selling prices
What is the standard convention for quoting currency pairs in the forex market?
Abbreviating both currencies to three-letter codes
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?
The exchange rate is locked at the time of agreement
Which of the following is NOT a type of transaction typically undertaken in the FX market?
Repo agreements
What role do central banks play in foreign exchange markets?
Using FX markets for controlling money supply
Why are foreign currency futures considered standardized versions of forward transactions?
They have fixed maturity dates and set contract sizes
'Settlement through CLS Bank or international banking system' implies what about FX transactions?
'T+2' refers to waiting 2 days for actual currency delivery
'Large international banks provide bid and ask prices' - Why do banks play this role in FX markets?
'Bid' and 'Ask' prices ensure market liquidity
'Currency swaps are negotiated individually' - How does this differ from exchange-traded contracts?
'Currency swaps' have flexible terms tailored to parties' needs
Explore the characteristics of fixed-term and instant access deposit accounts, advantages and disadvantages of investing in cash, and the differences between cryptocurrencies and fiat currencies. This chapter covers cash deposits, the money market, the property market, and foreign exchange.
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