Geoff and Linda live in Glasgow. Both are teachers, with Geoff in full time and Linda in part-time paid employment. When they bought a flat together in June 2018 the mortgage broker talked them through repayment and interest-only mortgages. They decided to use their savings as a deposit and chose a repayment mortgage, which by June 2020 was standing at £100,000. The market value of their flat had increased by 10% over this time period on the original purchasing price of £110,000. Together, in June 2020 the couple earn a net monthly income of £4000 and their expenditure has averaged £4200 a month over the last two years. In June 2020 their car loan is down from £4,000 to £2,500, their current account balance has dropped to zero and they have an overdraft on their current account of £1500. Meanwhile their savings account holds just £300. They also owe £3000 on a credit card. The rest of their balance sheet has not changed since June 2018.
2.1a In terms of savings, define the term ‘AER’ and describe how this concept is of use to savers when choosing between different savings products. (2 marks)
2.1b Two standard savings accounts, A and B, have an AER of 3%. Account A pays interest every quarter, and Account B every month. Work out whether the interest paid at the end of the year is higher for Account A, for Account B or the same for both accounts, assuming the same amount was invested in each account initially.
2.2 Briefly explain why a tracker fund offers a lower risk (and potential return) than shares in a single company. (3 marks)
2.3a Franz is looking to save for a £4,000 deposit towards buying a canal boat in 6 years. He has £500 lump sum already and is willing to add another £30 per month. Using the Borrowing and saving calculator, calculate the annual return he would need to seek from a saving product in order to reach his goal. (2 marks)
2.3b Explain which sort of financial product would be suitable for this saving strategy
2.3c Briefly explain another way that Franz could save the amount of his deposit if he is risk-averse or doesn’t have much risk capacity. (4 marks)
3.1 Transform the figures in Table 2 into one comparable measure of risk by expressing each probability as a decimal, rounded to four decimal places.
3.2 If occurrences of bicycle theft and burglary are statistically independent, what is the chance of suffering both a bicycle theft and a burglary in London during the next year? Express your answer as a percentage and show all your workings.
3.3 Give two reasons why a particular household in the West Midlands may in fact be at a higher risk of burglary than the probability shown in the table.
3.4 Briefly explain in your own words the meaning of moral hazard, and identify two ways in which an insurer can design a policy covering bicycle theft to reduce the risk of moral hazard.
Write a sentence or two for each of the points in the list below, as an initial reflection on your personal development plan (PDP). This plan will be shared with your tutor in order to help you develop in the area you have identified.
? First choose one area for development that you have identified, either before starting DB125 or during the module so far.
? Then identify one action that you have taken, or plan to take, to develop this area.
? Identify any constraints that you have encountered or anticipate.
? Identify a resource that has been helpful or would be helpful in the future.
? Decide on the timescale over which you hope to make progress in this area
Question 1 looks at the financial balance sheet and housing assets, and you will find relevant material in Section 6 of Chapter 4 of Personal Finance, Section 4.4 of Chapter 6 and Section 5 of Week 17. Financial resilience (defined in Chapter 1) refers to the ability to cope with life events or quickly return to the pre-event financial situation.
Question 2 is about savings and investment and the trade-off between risk and return. You will find relevant material in Chapter 5 (especially Sections 4–6) and the associated online study in Week 15 (in particular, Sections 3, 5 and 6). For Question 2.3 you will need to use the saving tool of the Borrowing and saving calculator.
Question 3 assesses your understanding of risk, probability and insurance. Relevant material can be found in Sections 3–5 of Chapter 7, and Sections 4 and 5 of the Week 19 online materials.
Knowledge and understanding
? Knowledge and understanding of basic concepts in economics and accounting that are significant for household finances, such as income, expenditure, debt and saving.
? Understanding of the relationship between financial decisions and the broader process of social and economic change.
? Awareness of the diversity of households, and the conflicts and negotiations around finance within them.
? Understanding of the significance of trade-offs/opportunity cost and other factors in financial planning over the life course. Cognitive skills
? Describe and compare the various ways in which social and economic factors impact on the financial decisions of different households.
? Interpret and use key financial and economic terms, concepts and theories to inform financial decision-making.
? Select, interpret and use qualitative and quantitative information in financial problem solving.
? Develop an understanding of complex relationships, situations and processes through relevant simplification. Key skills
? Communicate information clearly, accurately and appropriately.
? Interpret and use simple graphs, tables and charts.
? Demonstrate relevant numeracy – for example, calculating and using percentages, interest rates and averages.
? Use feedback and self-reflection to improve your own learning.
? Plan, study and manage a sequence of work that meets a deadline.
? Use information and communication technology (ICT) to work through and apply module themes and other relevant material.