Exam Questions

l.The functions of retail banks and investment bank?

Retail banks offer a range of services to individual customers and small businesses. The services can include current accounts, savings accounts, investment advice and broking, and loans and mortgages.

Retail banks perform two functions for customers: firstly, they enable customers to bank their money securely, access it easily, and conduct transactions; and secondly, they provide access to additional money to fund large purchases, such as buying a home. In return for holding customers’ funds, which they can then invest, banks pay customers interest.

Investment banking is a particular form of banking which finances capital requirements of an enterprises. Investment banking assists as it performs IPOs, private placement and bond offerings, acts as broker and carries through mergers and acquisitions.

Functions of Investment Banking:

 help public and private corporations in issuing securities in the primary market, guarantee by standby underwriting or best efforts selling and foreign exchange management.

 provides financial advice to investors and serves them by assisting in purchasing securities, managing financial assets and trading securities.

 differ from commercial banking in the sense that they don't accept deposits and grant retail loans.

 Small firms providing services of investment banking are called boutiques. These mainly specialize in bond trading, advising for mergers and acquisitions, providing technical analysis or program trading

2.Why was investment banking separated from commercial banking in the 1930s?

The separation between commercial and investment banking has been one of the primary features of the U.S. financial system since the 1930s. Congress is responsible for this separation, having decided that the investment banking activities of the nation's large commercial banks contributed to the widespread bank failures of the Depression. To prevent further failures, it passed legislation in 1933 that created a wall between commercial and investment banking activities and authorized a federal deposit insurance system.

3.When and why were many banking regulations ended in the us and Britain?

4.How do banks decide who to lend to?

1st off there are different types of creditors there are the traditional I need ok to good credit lenders and there are the high risk lenders, this answer only applies to the traditional lenders such as banks and credit unions.

Usually if the above 3 things look good to them you will be approved the application.. Keep in mind things such as market conditions and the economy will affect these decisions and you may find times when the bank will need you to over qualify before giving you a loan.

5. What are the advantages of banking online?

There are many benefits of banking online. The first and most obvious benefit is flexibility. Personal accounts can be accessed at any time day or night, regardless of a bank’s opening hours, as well as the inconvenience of public holidays and festive periods. There’s also the added incentive of no queues! Balances can be checked online, funds can be transferred, direct debits and standing orders can be set up and overdrafts can be amended.

In addition, the only cost associated with online banking is the cost of the time spent online (usually charged the Internet service provider). However, some banks offer free Internet access in return for the opening of an online account with them.

Other incentives that are used to attract customers to online services and away from their traditional high street bank include low interest rates. As online banks are cheaper to run than high street branches, savings can be passed directly to the customer.

Many online banks also offer offset or current account mortgages. These mortgages allow a trade off between the balance in a savings or current account against personal borrowings, which can result in the interest on a mortgage being reduced.

5. What are bonds and why are they issued by companies?

A bond is a promise to repay a sum of money at a certain interest rate and over a certain period of time.

Bonds, also known as fixed income, are an investment you can purchase where you essentially lend money to whoever issued the bond in exchange for future income in the form of interest payments.  At the end of the life of the bond, you get your original investment back.  The interest payments and principal (amount of your investment) are guaranteed by the company or government that issued the bonds.

Most bonds pay a set amount of money every so often to the holder of the bond. Company is lending money out (via the bond) and the borrower (issuing company or government) pays it interest.  This is the same sort of thing that happens in a savings account when your bank pays you interest on your deposits.

Bonds are considered a less risky investment compared to stocks because the interest payments and principal are guaranteed by the issuer.  Typically, “safer” bonds that are issued by the US government pay a lower interest rate, whereas “riskier” bonds issued by companies will pay a higher interest rate to compensate for the extra risk.

5. Which bonds are the most and the least reliable?

Bonds are one of the most reliable financial products. People that invest in bonds are very likely to maintain them until the due date, at which they will receive their principal back plus the interest matured. However, many other investors prefer to buy and sell bonds in a speculative way. Bond maturities range from six months to 30 years. Because of their long term investment nature there are several types of bond ownerships regulated by law, these help us to preserve the capital over the life span of the bond. American securities are generally traded through a bond broker or directly from Treasury Direct. Depending on the kind of bonds, the investor will receive a bond certificate, this guarantees the possession of the security.. Bonds come in a series of varieties and the income generated by them is taxed differently, depending on a series of factors, mainly on the issuer and the category.

5. What is credit rating, how is it used and who does it?

Credit rating - is an assessment of whether an entity would be able to pay back a loan or not. Nowadays, some employers may also use it to consider an applicant’s eligibility for a job. Leasing deposits and adjustment of insurance premiums are also affected by it.

Calculations for credit rating involve assessment of the financial history of the person or company in question, and also the assets and liabilities of same.

Personal credit ratings are calculated by Credit Reference Agencies, also known as Credit Rating Agencies. This analysis is offered by independent financial service companies. The factors that might affect a person’s credit rating are debt, lifestyle, interest, amount of credit used and savings.

Corporations may require a credit rating so that investors backing their debt security can analyse the risk involved. Corporate credit ratings are also assigned by credit rating agencies.

5. What are the factors that determine the interest rate that a customer is charged?

There are many influences that determine the interest rate. The three main factors are: the federal reserve discount interest rate, FISCO score and credit report. Comprehending the meaning of these factors will allow the borrower to choose the right type of loan, and avoid the high fees and frustration.

Federal Reserve discount interest rate: This rate refers to when the banks and other companies borrow money from the Federal Reserve. The Federal Reserve offers these lending companies loans on a discount rate because they borrow it on a short-term basis. The Reserve Banks’ board of directors set this discount rate. Incidentally this rate influences the prime rate, i.e. this is the rate that clients who have high credit ratings are charged by the lending companies. 

FISCO score and Credit Report: This is an evaluation report. There are many such reporting agencies or companies, that gather and sell personal information about an individual’s spending and living habits, along with creditworthiness and criminal history (if any). When a loan is applied for, the lending company contacts the credit bureau for your FISCO score. The FISCO score is a numerical figure that is calculated keeping the above factors in mind. This number ascertains your risk as a borrower. The higher the FISCO number is the better the interest rate that you will be offered.

One thing to remember is your Fisco score can also be affected by the number of times your credit report is accessed in a particular period of time. Therefore avoid the temptation of applying to every loan company in town. Select your favorite top four companies and apply only to them. Also keep in mind that you have to share your social security number while applying for the loan; hence prudence while applying for a loan is absolutely necessary.

5. How can a bank reduce the risks involved in granting a loan?

5. What is accounting? Why is it necessary for companies and organisations?

Practice and body of knowledge concerned primarily with methods for recording transactions, keeping financial records, performing internal audits, reporting and analyzing financial information to the management, and advising on taxation matters. It is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity.

Accounting provides information on the resources available to a firm, the means employed to finance those resources, and the results achieved through their use. Its function is to provide quantitative information about economic entities. The information is primarily financial in nature and is used in making economic decisions. Accounting records are used in describing the activities and financial status of many different kinds of economic entities including hospitals, schools, cities, governmental agencies and profit-oriented businesses.