chp 9 - mock exam
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Questions and Answers

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?

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

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

    <p>They reduce the amount of income tax paid</p> Signup and view all the answers

    What is the main difference between secured and unsecured loans?

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

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

    <p>By renegotiating repayment terms with the borrower.</p> Signup and view all the answers

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

    <p>Security provided in mortgages reduces lender risk.</p> Signup and view all the answers

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

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

    What role does creditworthiness play in obtaining an unsecured loan?

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

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

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

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

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

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

    <p>By accounting for all charges paid by the borrower</p> Signup and view all the answers

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

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

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

    <p>To comply with regulatory requirements and ensure transparency</p> Signup and view all the answers

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

    <p>12.55%</p> 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?

    <p>It quadruples</p> Signup and view all the answers

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

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

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

    <p>Annual Percentage Rate of Charge</p> 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?

    <p>To enable borrowers to compare different loan offers accurately</p> Signup and view all the answers

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

    <p>It varies with prevailing interest rates</p> Signup and view all the answers

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

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

    What protection do capped rate mortgages offer to borrowers?

    <p>Preventing interest rates from rising above a specified level</p> Signup and view all the answers

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

    <p>The borrower suffers additional costs</p> Signup and view all the answers

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

    <p>To avoid penalties for early cancellation</p> Signup and view all the answers

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

    <p>'Tracker' mortgage</p> Signup and view all the answers

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

    <p>Redemption penalty</p> Signup and view all the answers

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

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

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

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

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

    <p>Fixed rate mortgage</p> Signup and view all the answers

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

    <p>To provide protection and investment simultaneously</p> Signup and view all the answers

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

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

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

    <p>Providing protection and investment benefits simultaneously</p> 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?

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

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

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

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

    <p>Ensuring there are funds available to repay a mortgage</p> 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?

    <p>A lump sum equal to the selected cover amount is paid out</p> 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?

    <p>It is paid out immediately upon diagnosis</p> Signup and view all the answers

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

    <p>To generate income after the policyholder's death</p> Signup and view all the answers

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

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

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