Chartered Institute of Management Accountants (CGMA) · Fundamentals of Business Economics
CIMA BA1 Financial context of business: practice questions with answers
6 free exam-style questions on Financial context of business for CIMA BA1 Fundamentals of Business Economics. Try each one, then open the answer to read the explanation. Fincora has 60 original questions on this syllabus area.
Question 1
Harbour Mutual Bank funds 25-year residential mortgages using deposits that customers can withdraw on demand or at 30 days' notice. Which role of a financial intermediary does this mainly illustrate?
- A Aggregation
- B Risk transformation
- C Maturity transformation
- D Securitisation
Show the answer
Answer: C. Financial intermediaries (such as banks) link lenders and borrowers. Their main roles are: aggregation (pooling small amounts into large loans), maturity transformation (borrowing short and lending long), risk transformation (spreading lending across many borrowers so depositors bear less risk) and providing a convenient payments mechanism. Maturity transformation exposes banks to liquidity risk if many depositors withdraw at once.
Question 2
An investment will pay $12,000 a year for 8 years, with the first payment in one year's time. Using a discount rate of 6%, what is the present value of the investment, to the nearest $?
- A $78,989
- B $66,989
- C $74,518
- D $60,232
Show the answer
Answer: C. Present value of an annuity = annual amount x annuity factor, where annuity factor = (1 - (1 + r)^-n) / r
- Annuity factor = (1 - 1.06^-8) / 0.06 = 6.2098
- PV = $12,000 x 6.2098 = $74,518
(With the table factor 6.210 the answer is $74,520.)
Question 3
With its policy interest rate already close to zero, the central bank of Novaria creates new money electronically and uses it to buy large amounts of long-dated government bonds from banks, pension funds and insurance companies. Which of the following best describes this policy and its intended effect?
- A Quantitative tightening, intended to reduce the money supply and bring inflation down
- B Contractionary open market operations, intended to raise long-term interest rates and strengthen the currency
- C Quantitative easing, intended to raise bond prices, lower long-term interest rates and increase the money supply
- D Quantitative easing, intended to lower bond prices so that pension funds earn higher yields
Show the answer
Answer: C. Quantitative easing (QE) is used when the policy interest rate cannot usefully be cut any further. The central bank creates new money (central bank reserves) and buys financial assets, mainly long-dated government bonds.
- The extra demand raises bond prices and lowers their yields, reducing long-term interest rates throughout the economy
- Sellers of the bonds receive money, increasing the money supply and banks' reserves
- Lower borrowing costs and higher asset prices are intended to encourage spending and investment and to keep inflation close to target
Question 4
Hythe Trust will receive $15,000 a year for 5 years. The first receipt is at the end of year 3 and the last at the end of year 7. Using a discount rate of 8% a year, what is the present value of the receipts today, to the nearest $?
- A $59,891
- B $47,543
- C $51,347
- D $39,439
Show the answer
Answer: C. Receipts in years 3 to 7 are a deferred annuity. One method:
- 7-year annuity factor at 8% = 5.2064
- 2-year annuity factor at 8% = 1.7833
- Factor for years 3 to 7 = 5.2064 - 1.7833 = 3.4231
- PV = 15,000 x 3.4231 = $51,347
Alternatively: 15,000 x 5-year factor (3.9927) = $59,891, valued at the end of year 2; discounting for 2 years: 59,891 x 1.08^-2 = $51,347.
Question 5
Kinross Inc, a US company, sells a product to UK customers at a fixed price of $240, invoiced in US dollars. The exchange rate moves from £1 = $1.25 to £1 = $1.35. What is the effect on the sterling price paid by a UK customer for one unit?
- A It rises by £24.00
- B It falls by £15.36
- C It falls by £14.22
- D It rises by £14.22
Show the answer
Answer: C. The sterling price = dollar price / dollars per pound.
- Before: 240 / 1.25 = £192.00
- After: 240 / 1.35 = £177.78
- Change: a fall of £14.22 (7.41%)
The pound has strengthened (each £ buys more $), which is the same as the dollar weakening. Kinross's dollar revenue per unit is unchanged, but its product becomes cheaper for UK customers, so demand, and Kinross's total dollar revenue, may increase.
Question 6
Yasmin deposits $18,000 in a savings bond that pays simple interest of 3.5% a year. Interest is paid out to her each year and is not reinvested. What is the total of her original deposit plus all interest received after 4 years?
- A $20,520
- B $20,655
- C $2,520
- D $18,630
Show the answer
Answer: A. With simple interest, interest is calculated only on the original principal each period:
- Interest per year = 18,000 x 3.5% = $630
- Interest over 4 years = 630 x 4 = $2,520
- Total = 18,000 + 2,520 = $20,520
With compound interest (interest reinvested), the total would be 18,000 x 1.035^4 = $20,655.
Keep practising Financial context of business
Sign up free to practise this syllabus area in full, sit timed CIMA BA1 mocks and see your score by area. Every question on Fincora is written by us; none are past exam papers.
More CIMA BA1 syllabus areas
Practice questions are for study only and are not official exam questions. Back to CIMA BA1 mock exams and practice.