Question 1
Dominic is in his 40s and lives in a two bedroom flat in Blackburn. He works at the local council. When he bought the flat in April 2019 the mortgage broker talked him through repayment and interest-only mortgages. He decided to use his savings as a deposit and chose a repayment mortgage, which by April 2021 was standing at £83,000. The market value of his flat had fallen by 2% over this time period on the original purchasing price of £95,000.

In April 2021 Dominic earns a net monthly income of £1,600 and his expenditure has averaged £1,500 a month over the last two years. In April 2021 a personal loan to conduct initial refurbishment on the flat is down from £1,500 to £800, but his current account balance has dropped to zero and he has an overdraft on his current account of £1,300. Meanwhile his savings account holds just £50. He now owes £1,800 on a credit card. His cash holdings have dropped to £30. The rest of his balance sheet has not changed since April 2019.

Dominic is now reviewing his finances.

Table 1 shows his balance sheet and financial ratios in April 2019.

Table 1 Dominic’s household balance sheet – April 2019
April 2019
Assets (Total) 96,400
Liquid assets 1,400
Cash 100
Current account 1,000
Instant access savings account(s) 300
Other liquid assets 0
Other assets 95,000
Home 95,000

Liabilities (Total) 86,750
Short-term liabilities 250
Overdraft 0
Credit card 250
Other short-term liabilities 0
Other liabilities 86,500
Personal loans 1,500
Mortgage 85,000

Net worth / wealth 9,650
Current asset ratio 5.60
Leverage ratio 89.99
1.1 Using the information provided in Table 1, complete Dominic’s balance sheet for April 2021. (4 marks)

1.2 Explain the factors Dominic might have considered in choosing a repayment mortgage over an interest-only mortgage in 2019. (3 marks)

1.3 Using the financial ratios and other relevant information, compare Dominic’s financial situation in April 2019 and April 2021. (4 marks)

1.4 Briefly explain two other possible actions Dominic could take to improve his financial situation. (4 marks)

Question 2
Anita is living at home with her mother. But Anita has now found a job and is planning to move into her own flat. She wants to buy a flat four years from now, knowing that she will need a deposit of at least £9,000 in order to do so. Anita has £1,500 in a savings account.

2.1 If Anita uses all of her savings and saves £110 per month, what rate of return will Anita need to reach her target of £9,000 after four years? (3 marks)

2.2 Anita has seen that shares (equities) in a particular internet start-up company have given an 18 per cent return over the past two years. She is considering using all of her savings into buying this company’s shares. Give two reasons why putting all her savings into this one company’s shares might not generate anything close to the 18% return they’ve achieved over the past two years.(4 marks)

2.3 Briefly explain another way that Anita could save the amount of her deposit if she is risk-averse or doesn’t have much risk capacity. (4 marks)

2.4 How will Anita’s efforts to save for a deposit be affected if there is a fall in interest rates which causes a rise in house prices? (4 marks)

Question 3
Table 2 shows some data related to crime in different areas of England. When answering the questions that follow, assume that the rates of offences in each area in the year ending March 2020 are valid indicators of the current annual risks of these offences.

Table 2 Rates of police recorded crime for burglary and violence against the person for selected areas of England and Wales, year ending March 2020
Region Burglary Violence against the person
Cheshire 4.3 per thousand of population 36.2 per thousand of population
Durham 0.65% 4.16%
Hampshire 1 in 179 of population 1 in 33 of population
South Wales 0.0046 0.0293
Source: adapted from Office for National Statistics (2020)
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 marks)

3.2 If crimes categorised as burglary and violence against the person are mutually exclusive, what is the chance (expressed in percentage) of being victim of either crime next year in Cheshire? (3 marks)

3.3 Give two reasons why a particular household in South Wales may in fact be at a lower risk of burglary than the probability shown in the table. (4 marks)

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 burglary to reduce the risk of moral hazard. (5 marks)

Sample Solution

roblem, which may lead to increased severity and complications. Pt has uncontrolled Type 2 DM which interferes with his non-healing wound.
(Osborn, 2014 p1896; Porth, 2011)
CAD is a chronic process that affects the arteries perfusing the heart, brain, and kidneys. CAD includes arteriosclerosis(thickening, reduced elasticity, and calcification of the arterial wall), atheroschlerosis(type of arteriosclerosis that causes reduced myocardial blood flow), and arteritis(inflammation of the arterial wall, usually due to infection or auto-immune response). Atherosclerosis causes reduced blood flow to the myocardium because of buildup of plaque like cholesterol, lipids, and cellular debris infiltrating the intimal lining of the arterial wall. The myocardium normally extracts 75% of available oxygen from the coronary arteries. If the oxygen requirement is not met, then the myocardial blood flow needs to be increased. However, the arteries in CAD are not able to dilate because of the plaque buildup and calcification. As a result the heart needs to increase force of contraction in order to increase blood flow, and thus increasing cardiac output. “The result of all the unmet oxygen needs is the shift to anaerobic metabolism and myocardial tissue hypoxia, which results in angina.” CAD and HTN contribute to HF because the heart needs to increase the force and contractility to maintain tissue perfusion.
(Osborn, 2014 p920)
CHF includes cardiovascular response to inadequate perfusion and series of neurohormonal response in addition to structural abnormality. The systemic response to compensate for inadequacy is to increase cardiac output. Cardiac output is determined by heart rate and stroke volume. Additionally, stroke volume is influenced by three factors; contractility, preload (the volume of blood in the left ventricle at the end of a diastole), and afterload (pressure of resistance the ventricles must overcome to eject blood during systole).
Preload is assessed by measuring the right atrial pressure and is affected by any restriction. The example that Figueroa & Peters (2006) provides is an increase in positive pleural pressure (seen in COPD or asthma) will reduce ventricular filling. The compensatory mechanism that responds to the decrease preload by decreasing stretch is called the Frank-Starling law. The optimal filling pressure is between 10-12mmHg. The force of ventricular contraction will decrease when the pressure exceeds 12mmHg and the myocardial fibers are overstretched. A prolonged decrease force of contraction will lead to heart failure.
Contractility is the force generated by contracting myocardium and is expressed as the ejection fraction. The contraction of the myocardium depends on the ability of the ventricular muscle fibers. Structure of the heart such as valvular abnormalities can affect contractility. According to Figueroa & Peters (2006),” A heart with normal systolic function will maintain an ejection fraction over 50-55%.” As mentioned before, overstretching the myocardial fibers will lead to heart failure.
Afterload is the pressure or resistance the ventricles need to overcome to eject blood during systole and is assessed by the mean arterial pressure. According to Figueroa & Peters (2006), afterload represents three factors that are impaired in CHF patients; vascular resistance, wall tension, and intrathoracic pressure. (Osborn, 2014 p901-903)
When cardiac output action is compromised, the sympathetic nervous system and renin-angiotensin-aldosterone system is activated. The activation of the sympathetic nervous system releases norepineph