chp 9 - mock exam

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What is the purpose of pension contributions being tax efficient in many countries?

To provide tax benefits to the government

To discourage people from saving for retirement

To reduce the amount of income tax paid by individuals (correct)

To increase the taxable income of individuals

Why does the text highlight a serious funding issue for governments regarding state pensions in many countries?

Because people are retiring at a younger age

Because state pensions are not taxable

Due to the increasing life expectancy and longer retirements (correct)

Due to the lack of government income to support state pensions

What is the forecasted dependency ratio in the UK by 2050 according to the text?

1:1

2:1 (correct)

4:1

3:1

Why is the current provision of state pensions a problem for many governments as mentioned in the text?

There is no investment for future needs in state pensions Signup and view all the answers

How do pension contributions affect an individual's taxable income?

They reduce the amount of income tax paid Signup and view all the answers

What is the main difference between secured and unsecured loans?

Secured loans require collateral, while unsecured loans do not. Signup and view all the answers

In the given context, how does a lender enforce repayment for an unsecured loan?

By renegotiating repayment terms with the borrower. Signup and view all the answers

Why are interest rates usually lower on mortgages compared to other forms of borrowing?

Security provided in mortgages reduces lender risk. Signup and view all the answers

What happens if a borrower defaults on a mortgage compared to an unsecured loan?

For mortgage defaults, lenders can use the property as collateral to recover the loan amount. Signup and view all the answers

What role does creditworthiness play in obtaining an unsecured loan?

Creditworthiness is assessed to ensure the borrower can afford repayments for unsecured loans. Signup and view all the answers

What is the formula to calculate the Effective Annual Rate (EAR) based on the described shortcut method?

$1 + \left( \text{Quoted rate} \times \text{Appropriate frequency} \right)$ Signup and view all the answers

In the context of borrowing costs, what does APR stand for?

Annual Percentage Rate Signup and view all the answers

How can APR aid borrowers in comparing different credit and loan offers?

By accounting for all charges paid by the borrower Signup and view all the answers

What does the regulator in the UK associate with the term APR as per the text?

Annual Percentage Rate of Charge Signup and view all the answers

Why is it essential for lenders to disclose the APR to customers before agreements are signed?

To comply with regulatory requirements and ensure transparency Signup and view all the answers

What is the EAR calculated based on the shortcut method described in the text?

12.55% Signup and view all the answers

How is the Effective Annual Rate (EAR) affected if the quoted rate is doubled before applying the shortcut method?

It quadruples Signup and view all the answers

If a deposit pays interest quarterly, what frequency would be used in the calculation of the EAR?

4 Signup and view all the answers

In the UK, what does the regulator define APR as according to the text?

Annual Percentage Rate of Charge Signup and view all the answers

What is the main purpose of lenders quoting the EAR to borrowers before agreements are signed according to the text?

To enable borrowers to compare different loan offers accurately Signup and view all the answers

In a variable rate mortgage, how does the borrower's interest rate behave?

It varies with prevailing interest rates Signup and view all the answers

What is a common requirement for fixed rate borrowers once the fixed rate deal ends?

They need to remain with the lender paying the lender's variable rate Signup and view all the answers

What protection do capped rate mortgages offer to borrowers?

Preventing interest rates from rising above a specified level Signup and view all the answers

What happens if interest rates increase in a variable rate mortgage?

The borrower suffers additional costs Signup and view all the answers

Why might a borrower be hesitant to cancel a fixed rate loan even if market rates fall?

To avoid penalties for early cancellation Signup and view all the answers

What term is commonly used to refer to a mortgage that tracks the central bank's base rate?

'Tracker' mortgage Signup and view all the answers

What is calculated by lenders to recover losses when a fixed rate loan is canceled early?

Redemption penalty Signup and view all the answers

What is the main benefit of a fixed-rate mortgage during periods of rising interest rates?

Protection from higher rates throughout the fixed period Signup and view all the answers

What happens if a borrower fails to pay their mortgage on time under a variable rate agreement?

The borrower may suffer additional costs due to penalties or increased rates Signup and view all the answers

Which type of mortgage would be most suitable for someone seeking stable payments over an initial period?

Fixed rate mortgage Signup and view all the answers

What is one main reason whole-of-life policies are typically taken out?

To provide protection and investment simultaneously Signup and view all the answers

In a unit-linked policy, how is the return determined?

Directly related to the performance of units in the insurance company's fund Signup and view all the answers

What is the primary purpose of whole-of-life policies mentioned in the text?

Providing protection and investment benefits simultaneously Signup and view all the answers

Which type of whole-of-life policy offers a guaranteed sum along with any profits made during the policy period?

With-profits policy Signup and view all the answers

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

The return is influenced by the performance of units in the insurance company's fund Signup and view all the answers

What is one of the primary purposes of term assurance policies?

Ensuring there are funds available to repay a mortgage Signup and view all the answers

When a person selects the amount to be paid out in a term assurance policy, what happens if they die during the cover period?

A lump sum equal to the selected cover amount is paid out Signup and view all the answers

In term assurance, when is the lump sum payout made if an individual is diagnosed with a terminal illness?

It is paid out immediately upon diagnosis Signup and view all the answers

What is one reason term assurance policies are valuable for surviving partners?

To generate income after the policyholder's death Signup and view all the answers

How does term assurance differ from whole-of-life policies in terms of duration?

Term assurance has a fixed duration while whole-of-life policies last indefinitely Signup and view all the answers