CFM Terms quiz

What is the primary purpose of anti-money laundering (AML) regulations?

• To encourage borrowing from banks

• To prevent criminals from disguising illegally obtained funds as legitimate income

• To promote investment in government bonds

• To regulate the interest rates on loans

Answer explanation

The primary purpose of anti-money laundering (AML) regulations is to prevent criminals from disguising illegally obtained funds as legitimate income, ensuring the integrity of the financial system.

Which of the following best describes a bank overdraft?

• A loan provided by the government to businesses

• A facility allowing a bank account holder to withdraw more money than is available in their account, up to an agreed limit

• A type of savings account that earns interest

• A payment made to acquire non-current assets

Answer explanation

A bank overdraft is a facility that allows account holders to withdraw more money than they have, up to a specified limit, making it a form of short-term borrowing rather than a government loan or savings account.

What are bonds typically used for?

• To raise capital by governments or companies with a promise to repay the principal along with interest

• To provide short-term loans to individuals

• To store funds in a high-interest savings account

• To finance the purchase of raw materials

Answer explanation

Bonds are primarily used by governments and companies to raise capital. They issue bonds with a promise to repay the principal plus interest, making this the correct choice.

What is the meaning of capital receipts?

• Payments made to acquire or improve non-current assets

• Funds received by an organisation that are not part of its regular income

• A financial plan that estimates cash inflows and outflows

• A measure of the creditworthiness of a borrower

Answer explanation

Capital receipts refer to funds received by an organization that are not part of its regular income, such as loans or asset sales, distinguishing them from operational revenue.

What is crowdfunding?

• A method of raising large amounts of money from a single investor

• A process of borrowing money from banks at low interest rates

• Raising small amounts of money from a large number of people, typically via the internet, to fund a project or venture

• A financial plan that estimates cash inflows and outflows

Answer explanation

Crowdfunding is the process of raising small amounts of money from a large number of people, often through the internet, to support a project or venture, distinguishing it from traditional funding methods.

What is the term used to describe the distribution of profit to a company's shareholders?

• Drawings

• Dividends

• Fees

• Gearing

Answer explanation

The term 'dividends' refers to the distribution of a portion of a company's profits to its shareholders, making it the correct answer. 'Drawings' relate to owner withdrawals, while 'fees' and 'gearing' are unrelated concepts.

Which of the following best describes factoring?

• Selling unpaid invoices at a discount to obtain immediate cash flow

• Borrowing money using unpaid invoices as security

• Imposing charges for administration or services

• The ratio of a company's debt to its equity

Answer explanation

Factoring involves selling unpaid invoices at a discount to get immediate cash flow, allowing businesses to access funds quickly instead of waiting for customers to pay.

What does the term "exchange rate" refer to?

• The percentage rise in prices over time

• The value of one currency in terms of another currency

• The cost of borrowing money

• Fixed-interest securities issued by governments

Answer explanation

The term 'exchange rate' refers to the value of one currency in terms of another currency, indicating how much of one currency can be exchanged for another.

What is the primary focus of fiscal policy?

• Managing unpaid invoices

• Controlling inflation rates

• Taxation and spending to influence the economy

• Issuing fixed-interest securities

Answer explanation

The primary focus of fiscal policy is taxation and spending to influence the economy. This involves government decisions on how much to tax and how to allocate spending to achieve economic goals.

Which financial arrangement allows a buyer to pay for an asset in installments, with ownership transferring after the final payment?

• Invoice discounting

• Hire purchase agreement

• Factoring

• Early withdrawal penalty

Answer explanation

A hire purchase agreement allows a buyer to pay for an asset in installments, with ownership transferring only after the final payment is made, making it the correct choice for this financial arrangement.