other Financial Products chp 9
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Questions and Answers

What is the main purpose of a pension?

  • To provide tax deductions during working life
  • To provide a lump sum on retirement and an annual pension thereafter (correct)
  • To encourage people to buy homes
  • To invest in government bonds

    • Which statement best describes the tax efficiency of pension contributions?

  • They increase taxable income
  • They have no effect on income tax paid
  • They are subject to double taxation
  • They decrease taxable income and amount of income tax paid (correct)

    • Why do governments provide tax advantages for pension contributions?

  • To discourage people from saving for retirement
  • To increase the government's current year income
  • To encourage people to provide for their old age (correct)
  • To avoid funding issues for governments

    • What is a common issue with state pensions according to the text?

    <p>They present serious funding issues due to longer retirement periods</p> Signup and view all the answers

    How are state pensions funded in many countries?

    <p>Out of a government's current year income without investment for future needs</p> Signup and view all the answers

    Which of the following is NOT mentioned as a type of retirement fund in the text?

    <p>Personal savings accounts</p> Signup and view all the answers

    What is the forecasted dependency ratio in the UK by 2050?

    <p>5:2</p> Signup and view all the answers

    Which type of pension scheme is known for providing an employee with a pension related to their final salary based on years of service?

    <p>Final Salary or Defined Benefit (DB) scheme</p> Signup and view all the answers

    Why have many companies shifted from offering Final Salary schemes to Defined Contribution schemes for new employees?

    <p>Rising life expectancies and volatile investment returns</p> Signup and view all the answers

    What is a key advantage for employers of Defined Contribution (DC) schemes over Defined Benefit (DB) schemes?

    <p>Lower costs and risks for employers</p> Signup and view all the answers

    What are Personal Pensions also known as?

    <p>Individual pension plans</p> Signup and view all the answers

    Who typically organizes personal pension schemes for employees?

    <p>'Companies'</p> Signup and view all the answers

    What is a distinguishing feature of a non-contributory pension scheme?

    <p>'No contribution required from employees'</p> Signup and view all the answers

    Why do many private sector employers no longer provide Final Salary schemes to new employees?

    <p>'Rising life expectancies and volatile investment returns'</p> Signup and view all the answers

    What is one of the advantages of occupational pension schemes over personal pensions?

    <p>Lower running costs and employer contribution obligations</p> Signup and view all the answers

    In what way do Defined Contribution (DC) schemes differ from Defined Benefit (DB) schemes regarding pension payouts?

    <p>Pension amount determined by investments in DC schemes, unlike DB schemes</p> Signup and view all the answers

    What is the key responsibility that lies with the individual in a private scheme?

    <p>Monitoring the performance of their investments</p> Signup and view all the answers

    Which country are Individual Retirement Accounts (IRAs) primarily found in?

    <p>United States</p> Signup and view all the answers

    What determines if contributions to a traditional IRA are tax-deductible?

    <p>Taxpayer's income, tax filing status, and employer-sponsored retirement plan coverage</p> Signup and view all the answers

    What is the consequence of having an unauthorised overdraft?

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

    How are retailers paid when customers use credit cards for purchases?

    <p>Retailers pay a small fee to credit card companies</p> Signup and view all the answers

    What can customers choose to do when they receive a monthly credit card statement?

    <p>Pay all the money owed or a percentage of it</p> Signup and view all the answers

    What is a characteristic of unsecured loans?

    <p>'Unsecured' by collateral</p> Signup and view all the answers

    What is often offered by credit card companies to attract new customers?

    <p>$0 interest temporarily for balance transfers and new purchases</p> Signup and view all the answers

    What should borrowers try to avoid when it comes to overdrafts?

    <p>Unauthorised overdrafts as much as possible</p> Signup and view all the answers

    How do traditional IRAs differ from Roth IRAs?

    <p>One offers tax-deductible contributions while the other does not</p> Signup and view all the answers

    What formula is used to calculate the effective annual rate (EAR)?

    <p>Quoted rate divided by appropriate frequency</p> Signup and view all the answers

    What factor is added to the quoted rate when calculating the EAR?

    <p>1</p> Signup and view all the answers

    In the UK, what does APR stand for in relation to borrowing costs?

    <p>Annual Percentage Rate of Charge</p> Signup and view all the answers

    What is a mortgage typically provided for?

    <p>Financing property purchase</p> Signup and view all the answers

    What term describes property bought with the intention to be let out to tenants?

    <p>'Buy-to-let' property</p> Signup and view all the answers

    What type of mortgage involves only paying interest without reducing the principal balance?

    <p>'Interest-only' mortgage</p> Signup and view all the answers

    What should be considered about capital gains related to a principal private residence?

    <p>Exempt from capital gains tax</p> Signup and view all the answers

    What could be an additional cost associated with purchasing a property?

    <p>Legal fees for a lawyer</p> Signup and view all the answers

    What is the potential perception about property investments compared to other investments?

    <p>'Property is seen as a reasonably safe investment'</p> Signup and view all the answers

    'Buy-to-let' mortgages are commonly used for which purpose?

    <p>'Letting the property out to tenants'</p> Signup and view all the answers

    What is the main difference between unsecured loans and mortgages?

    <p>Mortgages require security while unsecured loans do not.</p> Signup and view all the answers

    If a borrower defaults on an unsecured loan, what is the typical action taken by the lender?

    <p>Start legal proceedings to enforce repayment.</p> Signup and view all the answers

    In the context of borrowing costs, why are mortgages considered cheaper compared to credit cards?

    <p>Mortgages are usually secured by property.</p> Signup and view all the answers

    What happens if a borrower with an unauthorised overdraft does not inform the bank of spending excesses?

    <p>The bank charges high fees, considering it as a form of financial penalty.</p> Signup and view all the answers

    How are flat rates quoted by loan companies different from the effective annual rate (EAR)?

    <p>Flat rates do not consider compounding interest like EAR does.</p> Signup and view all the answers

    What is the typical course of action for a lender if a secured loan is not repaid by the borrower?

    <p>Start legal proceedings to repossess the specific property.</p> Signup and view all the answers

    Why do lenders prefer issuing secured loans for property purchases rather than unsecured loans?

    <p>Secured loans offer lower interest rates due to property collateral.</p> Signup and view all the answers

    What is one advantage of having a mortgage over an unsecured loan in terms of non-repayment consequences?

    <p>'Lenders can repossess specific collateral for defaulted loans.'</p> Signup and view all the answers

    What is a key differentiator between Islamic banks and conventional banks according to the text?

    <p>Islamic banks focus on asset-backed transactions.</p> Signup and view all the answers

    What is a fundamental requirement for a contract to be considered valid under Islamic law?

    <p>Parties must possess perfect knowledge of the terms of exchange.</p> Signup and view all the answers

    In Islamic finance, what plays a crucial role in ensuring the ethical conduct of financial activities?

    <p>Asset-backed transactions</p> Signup and view all the answers

    What is the primary function of the Shariah Supervisory Committee (SSC) in Islamic banking practices?

    <p>To monitor compliance with Shariah principles.</p> Signup and view all the answers

    What is the key feature of a Murabaha transaction in Islamic finance?

    <p>The bank purchases the property and sells it to the customer at a higher price.</p> Signup and view all the answers

    How does Islamic banking differ from conventional banking regarding funding sources?

    <p>Islamic banks ensure their funding sources comply with Shariah law.</p> Signup and view all the answers

    What is the main objective behind Islamic banking principles according to the text?

    <p>To provide ethical and socially responsible financial services.</p> Signup and view all the answers

    How does an Ijara transaction differ from a conventional mortgage?

    <p>Ijara involves leasing the property but promises transfer of title upon final payment.</p> Signup and view all the answers

    What is the main reason why Islamic banks are prohibited from investing in certain businesses?

    <p>They aim to comply with Shariah law by avoiding unlawful ventures.</p> Signup and view all the answers

    How do home purchase plans offered by Islamic banks differ from conventional mortgage arrangements?

    <p>They are structured based on diminishing partnership and leasing principles.</p> Signup and view all the answers

    What is the key advantage of a repayment mortgage over other forms of mortgage?

    <p>Guaranteed to pay off the loan over the term of the mortgage</p> Signup and view all the answers

    What does an interest-only mortgage require the borrower to do?

    <p>Only make interest payments throughout the period of the loan</p> Signup and view all the answers

    What is one of the main risks attached to an interest-only mortgage?

    <p>Having the property repossessed if repayments fail</p> Signup and view all the answers

    In a repayment mortgage, when do payments become predominantly capital?

    <p>Towards the middle of the term</p> Signup and view all the answers

    What does a lender consider when assessing applicants for a loan?

    <p>Projected income on the property</p> Signup and view all the answers

    What is referred to as the loan-to-value ratio in mortgage applications?

    <p>Size of loan in relation to property value and applicant's income</p> Signup and view all the answers

    When does the capital begin to reduce significantly in a repayment mortgage?

    <p>25</p> Signup and view all the answers

    What happens if a borrower fails to meet repayments in an interest-only mortgage?

    <p>'The property is at risk of being repossessed'</p> Signup and view all the answers

    In an offset mortgage, how are savings utilized for interest calculation?

    <p>Savings decrease the mortgage amount for which interest is charged</p> Signup and view all the answers

    What is the primary benefit of an offset mortgage?

    <p>Flexibility in managing finances</p> Signup and view all the answers

    In a variable rate mortgage, how does the interest change?

    <p>It tracks the official base rate</p> Signup and view all the answers

    What is the key advantage of a fixed rate mortgage?

    <p>Protection from higher rates</p> Signup and view all the answers

    How do capped rate mortgages protect borrowers?

    <p>By capping the maximum interest rate</p> Signup and view all the answers

    What is a common feature of discounted rate mortgages?

    <p>'Lock-in' period after the deal ends</p> Signup and view all the answers

    What is the primary reason charging or receiving interest is prohibited in Islamic finance?

    <p>'Haram' (prohibited) due to exploitative nature</p> Signup and view all the answers

    'Risk-sharing' is emphasized in Islamic finance to avoid:

    <p>'Gharar' (risk or uncertainty)</p> Signup and view all the answers

    'Capped rate' mortgages are designed to protect borrowers from:

    <p>'Interest rate risk' exceeding a set limit</p> Signup and view all the answers

    'Lock-in' periods are commonly associated with which type of mortgage?

    <p>'Fixed rate' loans with penalty clauses</p> Signup and view all the answers

    What is the main event insured in a life policy?

    <p>Death</p> Signup and view all the answers

    What does a lump sum payment in a life policy depend on besides the date of death?

    <p>Investment performance</p> Signup and view all the answers

    What is the main difference between whole-of-life assurance and term assurance?

    <p>Investment options</p> Signup and view all the answers

    What does a term assurance policy provide coverage for?

    <p>For a specific period</p> Signup and view all the answers

    In life policies, what determines the total payout to beneficiaries?

    <p>Investment performance and guarantee sum</p> Signup and view all the answers

    What is the primary purpose of an investment-based life policy?

    <p>To provide financial protection upon death</p> Signup and view all the answers

    What is the main purpose of a whole-of-life policy compared to a term assurance policy?

    <p>Serve both protection and investment purposes</p> Signup and view all the answers

    Which type of whole-of-life policy pays a guaranteed amount plus any profits made between policy inception and death?

    <p>With-profits whole-of-life policy</p> Signup and view all the answers

    What happens if an individual with term assurance is diagnosed with a terminal illness expected to result in death within 12 months?

    <p>The lump sum is payable immediately</p> Signup and view all the answers

    What is the primary reason for purchasing a whole-of-life policy as part of protection planning exercise?

    <p>To provide funds for tax payments on death</p> Signup and view all the answers

    In term assurance, how does the selected amount and cover period impact the policy?

    <p>Affects the premium amount paid by the insured</p> Signup and view all the answers

    What distinguishes unit-linked whole-of-life policies from other types of whole-of-life policies?

    <p>The return is directly linked to investment performance</p> Signup and view all the answers

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