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CIMA BA1 Flashcards

VIVA Financial

Learn or revise key terms and concepts for your CIMA BA1 Fundamentals of Business Economics exam using OpenTuition interactive CIMA BA1 Flashcards.

There are over 50 CIMA BA1 Fundamentals of Business Economics flashcards available

What are interest rate options?

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These are options to buy or sell interest rate futures and allow borrowers or depositors to enjoy favourable interest rate movements whilst protecting themselves against adverse movements.

Upfront non-returnable premiums have to be paid to acquire the options that provide this protection.

 

What are interest rate futures?

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These are traded on futures market.

They are derivatives whose value depends on the interest rate.

By arranging to buy or sell future contracts, profits can be made on the contracts that will largely compensate for any losses made on interest rate movements.

 

What is a forward rate agreement (FRA)?

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Forward rate agreements (FRAs) allow a borrower or depositor to fix a n interest rate for a period in the future eg starting in 6 months and ending after 12 months.

Is the following statement true or false?

If an option is allowed to lapse then the option premium is repaid.

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False. It’s like car insurance: the premium is not repaid even if you make no claim.

 

What is a currency option?

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Currency options give their owner the right, but not the obligation, to buy or sell currency at an agreed price.

What is a forward exchange contract?

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A forward contract is a contract to exchange an agreed amount of currency at an agreed date in the future and an agreed exchange rate.

 

What are the three types of risk that can arise from currency movements in international trade or investment?

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  • Transaction risk (import/export)
  • Economic risk (goods becoming less competitive because of exchange rate movements)
  • Translation risk (the value of foreign subsidiaries rising and falling with exchange rates)

At a discount rate of 5% a project has a positive NPV of $1,000; at 12% the NPV is -$800.

What is the approximate IRR?

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cima ba1 53

cima ba1 40.16

What is the definition of the internal rate of return?

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IRR = the discount rate at which the project yields a zero NPV

 

What is the present value of a perpetuity of $3,000pa received every year starting at time 1 if the discount rate is 5%?

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PV of the perpetuity starting at time 1 = Annual amount/r = $3,000/0.05 = $60,000

 

What is the present value of $8,000 received at times 2, 3 and 4 if the discount rate is 5%?

An extract from the cumulative discount tables is shown below.

cima ba1 37.00

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Required discount factor = 3.546 – 0.952 = 2.594

PV = $8,000 x 2.594 = $20,752

 

What is the present value of $15,000 received at times 1, 2, 3 and 4 if the discount rate is 6%?

An extract from the cumulative discount tables is shown below.

cima ba1 37.00

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$15,000 x 3.465 = $51,975

 

What is the present value of 2,000 received after 4 years if the discount rate is 5%?

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2,000/(1.05)4 = $1,645

If $1,000 is deposited for 3 years at 5% compound interest, how much will be available at the end of the period?

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1,000 x 1.053  = 1,159.63

If the reserve ratio for banks is 30% (ie 30% of deposits cannot be lent out), how much credit is created in total if a customer deposits $12,000?

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12,000/0.3 = $40,000

 

As borrowing terms increase will the interest rate required usually rise or fall?

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It will rise. The normal yield curve shows an increase in interest rate as the period of the loan increases.

 

If there is a fixed interest Government bond with a coupon rate of 5%, what value per $100 nominal will this have if the current interest rate in the economy is 2%?

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$250.

Check: $100 par of the bond will pay $5 annually ie 5% of the nominal value. If the bond actually costs $250 to buy then the return to the purchaser is 5/250 = 2%. Market prices move to provide the return required.

If a company is doing well and making good profits, which one of the following will increase in value?

  • Debentures
  • Equity (ordinary) shares
  • Preference shares
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Equity shares will increase in value

What is a convertible?

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Convertibles start life as debentures but give investors the option of converting the debentures to shares. This allows investors to take a ‘wait-and-see’ approach. Invest in safe debentures, then convert to shares if the company seems to be doing well.

 

What is a debenture?

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A financial instrument recording a debt. Debentures can be secured on assets and can be redeemable or irredeemable. Fixed amounts of interest must be paid, usually every 6 months.

 

What are financial instruments?

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Financial instruments are assets that can be traded and which permit efficient flows of capital between investors and those needing capital for their operations. Financial instrument are contracts that create a financial asset of one entity and a financial liability or equity instrument of another entity

What are five functions of banks?

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Any five of:

  • Safe storage: banks store cash in their vaults and can impose strict security.
  • Risk reduction: if a bank is lending money it has expertise to properly appraise the borrower.
  • Maturity transformation: for example, banks can make use of lots of short-term deposits to create long-term loans.
  • Consolidation: lots of small deposits allow several large loans.
  • Credit creation: by issuing credit cards and organising loans and overdrafts, banks help to ‘create’ money.
  • Intermediation: borrowers and lenders are matched.
  • Transfer of money: eg between purchaser and supplier.

 

What are four purposes of money?

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  • A means of exchange
  • A store of value
  • A unit of account
  • A means of deferred payment

 

What are the four elements of a time series and which two are determined in moving average calculations?

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  • Trend: this is an underlying smooth increase or decrease of an amount as time passes.
  • Seasonal variations: cycles of variation repeating in less than a year
  • Cyclical variations: cycles of variation repeating in more than a year.
  • Random effects: non-repetitive and non-predictable variations.

Time series analysis investigates the first two of these.

When is Spearman’s rank correlation coefficient of particular use?

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When items can be ranked (ie placed in order) but assigning a score or value to each item is difficult.

“If a coefficient of correlation is very high then this is strong evidence that movements in one variable cause the other.”

Is that statement true or false?

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False. Correlation is not causation

If the coefficient of correlation, r, is 0.9 what is the coefficient of determination and how can it be interpreted?

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Coefficient of determination = r2  = 0.92  = 0.81

81% of the change in one variable can be explained by change in the other.

 

What do the values of 1, 0 and -1 mean when talking about a coefficient of correlation?

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  • r = +1, meaning perfect positive correlation where all points lie on the line and as one variable increases, so does the other.
  • r = -1, meaning perfect negative correlation where all points lie on the line and as one variable increases, the other decreases.
  • r = 0 means no correlation.

 

Linear regression will give constants which fit a line of the type: y = ax + b.

Which of y or x should be the independent variable?

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x.

Essentially the value of x drives the value of y

What is meant by the term ‘cross-sectional’ study?

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In a cross-sectional study data from a number of members of a population is examined at a single point in time. For example, the gross profit percentage achieved by 12 branches of a company in 2020.

What is meant by the term ‘longitudinal study’?

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In a longitudinal study, measurements are taken of the same variable at different points in time. For examples, sales each month, profit over a number of years occurrence of illness in a sample of people as they age.

What are the four Vs of big data?

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  • Volume
  • Variety
  • Velocity
  • [Veracity]

 

Below there is a cumulative frequency curve for the heights in metres of 300 people.

What is the median height?

cima ba1 48

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The median is the value of the half-way through the population when arranged in order. Here the 150/151 person would be 1.6m tall.

What are the two types of common chart used to display frequency distributions?

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  • Histograms
  • Ogives (cumulative frequency curves)

What is the ACCURATE mnemonic for good information?

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  • Accurate
  • Complete
  • Cost-beneficial
  • User-targeted
  • Relevant
  • Authoritative
  • Timely
  • Easy-to-use

If a government were to legislate for maximum prices for a commodity how can demand then be matched to supply?

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  • Queueing
  • Rationing
  • Vouchers (essentially rationing)

What are four possible adverse consequences if a government sets minimum prices for a product?

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  • Over-production
  • Un-needed producers attracted into the industry
  • Low efficiency of production
  • Waste of resources

 

What is an externality?

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An externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit. Externalities interfere with the ability of market forces to optimise the allocation and use of resources.

 

What are public goods?

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A public good is a product or service that one individual can consume without reducing its supply to another individual, and from which no one is excluded. Examples include public roads, street lighting, defence and law enforcement.

What is a natural monopoly?

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A natural monopoly is a type of monopoly that exists due to the high start-up costs or powerful economies of scale of conducting a business in a specific industry. A company with a natural monopoly might be the only provider or a product or service in an industry or geographic location.

 

It the purchase tax on raw material is increased, will the supply curve move to the right or to the left?

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The supply curve will move leftward as fewer goods will be produced for a given price.

 

In what direction would the demand curve for a product move if the price of a substitute product increased?

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The demand curve should move to the right.

A price elasticity of demand of <1 means what?

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The item is showing inelastic behaviour. A rise in price will affect demand relatively little and revenue will increase.

 

What is the formula for the price elasticity of demand?

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The price elasticity of demands=

The proportional (or percentage) change in demand
The proportional (or percentage) change in price

In the diagram below, which of Product A or Product B has the higher elasticity of demand?

cima ba1 43

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Product B shows greater variation in quantity for a given variation in price so is the more elastic product.

 

When complying with the UK Corporate Governance, what are the three board sub-committees consisting of (exclusively or principally) non-executive directors?

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  • Remuneration committee
  • Nomination committee
  • Audit committee

Is the following statement true or false?

When complying with the UK Corporate Governance Code a company can have twice as many executive directors as non-executive directors.

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False. There should be a balance (about 50/50)

Is the following statement true or false?

When complying with the UK Corporate Governance Code a company can have the same person as CEO and Chairman.

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This is false. They roles must be separated.

 

What are the three classes of stakeholder?

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Internal, connected, external

What is the formula for return on equity?

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100 x Operating profit after interest and before tax/Shareholders’ equity

What is the formula for return on capital employed?

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100 x Operating profit before tax and interest/Capital employed

Is the following statement true or false?

If a company has limited liability this means that the company is protected from its creditors.

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False. The company’s liability is unlimited but shareholders enjoy protection from the company creditors.

 

Are the following statements true or false?

Not-for-profit organisations implies they are state-owned

Public sector organisations are all not-for profit organisations

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Neither is true. A charity is not-for-profit, but is not necessarily state-owned. A state-owned airline might be expected to make a profit.

What is an ‘organisation’?

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A social arrangement which pursues collective goals, which controls its own performance, and which has a boundary separating it from its environment

What is PESTEL?

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PESTEL is a way of appraising the macro-environment. The environmental influences are:

  • Political
  • Economic
  • Social
  • Technological
  • Environmental/ecological
  • Legal

 

What is the purpose of trade agreements?

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Trade agreements are treaties between countries on their reciprocal tariffs, quotas etc.

The purpose of the agreements is to reduce the barriers to trade and simplify international trade, improve economic efficiency and provide consumers with more choice.

They reduce protectionism.

 

What is ‘off-shoring’?

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Off-shoring is the process of sending manufacturing abroad eg to make use of cheaper labour rates.

What is meant by the term ‘globalisation’?

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The process by which the countries and businesses throughout the world are becoming increasingly interconnected because of increased trade. Globalisation has increased the production of goods and services. The biggest companies are multi-national companies with subsidiaries in many countries throughout world.

Does high inflation in a country weaken or strengthen a currency with respect to the currency of a low-inflation country?

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The currency of the country with the higher inflation weakens with respect to the currency of the low inflation currency.

A country is trading with the USA. If its currency strengthens against the US$ what effect does this have on the price of its exports in the USA and the cost of its imports from the USA?

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  • Exports: become more expensive in US$
  • Imports: become cheaper in terms of the country’s own currency

What are four possible protectionist methods?

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  • Quotas
  • Tariffs
  • Administrative difficulties
  • Subsidies

What are four potential drawbacks arising from international trade?

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Any four of:

  • Transport costs and carbon footprint
  • Export of jobs
  • Strategic weakness
  • Balance of payment problems
  • Dumping

What are four reasons why international trade occurs?

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Any four of:

  • Natural resources available in one country
  • Access to low labour costs
  • Economies of scale
  • Skills
  • Unique products in one country only

 

What is comparative advantage in relation to international trade?

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It is when it is better if one country switches production to a particular product because, compared to making another product, it is comparatively more efficient

What is absolute advantage in relation to international trade?

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A country has absolute advantage when it performs a task more efficiently than producers in other countries

With regard to the balance of payments what are the capital and current accounts?

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Capital account: flows relating to investments and proceeds from the sale of investments.

Current account: mainly flows from the effects of trade and income.

 

What is the ‘multiplier’?

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If a government injects money into the economy, this will be ultimately earned by suppliers and employees who will spend it in turn thus stimulating the economy even more. The effect is that the total additional money spent in the economy is:

Initial expenditure x 1/Marginal propensity to save

What are the three elements of fiscal policy?

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  • Government spending
  • Taxation
  • Government borrowing

What is an ‘ad valorum’ tax?

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An ad valorem tax is charged as a fixed percentage of the price of the good.

A good example of an ad valorem tax is VAT

 

What are regressive, progressive and proportional taxes?

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  • A regressive tax takes a higher proportion of a poor person’s salary than it does for a rich person.
  • A progressive tax takes a higher proportion of income as income rises
  • A proportional tax takes exactly the same proportion of income tax from all levels of income.

 

What are the four ways in which governments can obtain more money?

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  • Taxation
  • Borrowing
  • Printing money
  • Sale of state assets (eg privatisation)

 

In the following diagram, what label should be on the middle horizontal arrow?

cima ba1 33

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cima ba1 37

What are the Laspayre and Paasch indexes?

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They are indexes to measure inflation.

Laspayre: uses base year quantities or base year values.

Paasch: uses current year quantities or current year values.

What are the five types or causes of inflation?

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  • Demand pull
  • Cost push
  • Import cost inflation
  • Expectation
  • Increase in the money supply

What events can cause a rightwards shift in the aggregate demand curve?

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  • An increase in disposable income
  • Consumers deciding to save less (known as a lower marginal propensity to save).
  • Increased government spending
  • A more relaxed monetary policy (for example, the government simply printing more money.
  • An increase in net exports.

What are the deflationary and inflationary gaps?

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A deflationary gap occurs when aggregate demand needs to increase if full employment is to be achieved. An inflationary gap occurs when aggregate demand has to decrease to match full employment.

 

In the following diagram, what is happening when the aggregate supply line becomes vertical?

cima ba1 26

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Full employment has been reached and rising demand will push up prices steeply.

What arrow label (on the left) is missing from the above diagram which shows the circular flow of income?

cima ba1 16

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cima ba1 20

GDP = Household spending + Capital

investment spending

 + ????? + Exports of goods and services – Imports of

goods and services

 

What term is missing from the above formula for GDP?

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Government spending

What are the missing labels on this diagram (Mendelow’s Matrix)?

cima e3fc .58.14

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cima e3fc .58.19


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