AQA A-level Economics: Financial markets, financial assets, money and bonds (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the AQA AS and A-level Economics specification (version 1.3, 29 June 2022), A-level sub-section The structure of financial markets and financial assets (4.2.4.1 in the combined PDF; 3.2.4.1 on the AQA website). Every country, firm and figure is invented. Marks shown are for practice only. The study guide and revision notes cover the content, and the course hub is AQA A-level Economics.

Questions

1. Explain two problems of barter that the use of money overcomes. [4]

2. In Country B, narrow money is notes and coins held outside banks. Broad money is narrow money plus all bank deposits. Notes and coins are 30, instant-access deposits 120, notice accounts 90 and fixed-term deposits 160 (billions of units).

(a) Calculate broad money. [1] (b) Calculate narrow money as a percentage of broad money. [2] (c) Households withdraw 20 from fixed-term deposits as cash. State the new values of narrow and broad money. [2]

3. (a) Identify the market (money, capital or foreign exchange) in which each takes place: (i) one bank lends to another for two weeks; (ii) a firm sells bonds repayable in 15 years; (iii) an importer buys foreign currency to pay a supplier. [3] (b) Explain why shares are traded in the capital market and not the money market. [2]

4. A government bond has a nominal value of 100 and a coupon of 3.5.

(a) Calculate its yield when the market price is 87.5. [2] (b) Calculate its yield when the price rises to 140. [2] (c) State the relationship between a bond’s price and its yield. [1]

5. An irredeemable government bond has a coupon of 4 per 100 nominal and sells at 100. Market interest rates then rise from 4% to 5%. Explain what happens to the price and calculate the new price. [6]

6. Firm C needs 250,000 and has 75,000 shares in issue. The bank offers a loan at 8%. Alternatively the firm can issue new shares at 10 each.

(a) Distinguish between debt and equity. [2] (b) Calculate the annual interest on the loan. [1] (c) Calculate the number of new shares needed. [1] (d) Calculate the percentage of the firm that existing shareholders would own after the share issue. [2]

7. An investor buys government bonds with a nominal value of 1,000 at a price of 96 per 100 nominal. The coupon is 5%.

(a) Calculate the annual coupon income. [1] (b) Calculate the amount the investor pays. [1] (c) Calculate the yield, to two decimal places. [2] (d) Explain why the yield is higher than the coupon rate. [2]

8. Country D needs to raise 450 million by selling bonds with a coupon of 5 per 100 nominal. The bonds sell at 90 per 100 nominal.

(a) Calculate the nominal value of bonds that must be sold. [2] (b) Calculate the annual coupon payment. [1] (c) Calculate the yield, to two decimal places. [2] (d) State the amount repaid at maturity. [1]

9. Analyse how well-functioning financial markets can increase investment in an economy. [6]

10. A government bond has a coupon of 4 per 100 nominal. Market interest rates rise from 4% to 6%. The bond price falls from 100 to 98.11 if one year remains to maturity, to 91.58 if five years remain, and to 85.28 if ten years remain. An irredeemable bond falls to 66.67. Evaluate whether a rise in market interest rates harms everyone who owns government bonds. [8]

11. Assess whether a growing firm should finance an expansion by issuing shares rather than by bank borrowing. The firm would borrow 400,000 at 6% if it chose the bank. [9]

Answers

1. Double coincidence of wants: each trader must find someone who has what they want and wants what they have [1]; money lets people sell for money and buy separately [1]. No common measure of value: in barter every good has many relative prices [1]; money as a unit of account gives one price for each good [1]. (Other valid problems include indivisibility and difficulty of saving.) [4] Examiner insight: Explanations score when each problem is paired with how money solves it. Naming two problems with no link to money leaves the question half answered.

2. (a) 30 + 120 + 90 + 160 = 400 [1] [1] (b) 30 ÷ 400 [1] × 100 = 7.5% [1] [2] (c) Narrow money = 30 + 20 = 50 [1]; broad money is unchanged at 400, because deposits fall by 20 while notes and coins rise by 20 [1] [2] Examiner insight: In part (c), saying broad money is unchanged is only convincing with the reason: one component fell by exactly what another rose by.

3. (a) (i) Money market [1]; (ii) capital market [1]; (iii) foreign exchange market [1] [3] (b) Shares provide long-term finance and have no repayment date [1]; the money market deals only in short-term funds, usually maturing within a year [1] [2] Examiner insight: The dividing line between money and capital markets is the length of time funds are lent. Answers that rely on the size of the sums are weaker.

4. (a) Yield = coupon ÷ price × 100 [1] = 3.5 ÷ 87.5 × 100 = 4.00% [1] [2] (b) 3.5 ÷ 140 × 100 [1] = 2.50% [1] [2] (c) They are inversely related: a higher price means a lower yield [1] [1] Examiner insight: Show the division with the price given. Using nominal value of 100 gives 3.5% and answers a different question.

5. The coupon is fixed at 4 per 100 [1]. New bonds now pay 5 per 100, so the old bond is less attractive [1]. Demand falls and holders sell [1]. The price falls until its yield equals the new market rate [1]. New price = 4 ÷ 0.05 = 80 [1], a fall of 20% from 100 [1] [6] Examiner insight: Strong answers explain the mechanism through the fixed coupon and the alternative return. Stating that the price falls and giving the new number, without the reason, covers only part of the question.

6. (a) Debt is borrowed money that must be repaid with interest and gives no ownership [1]; equity is funds from owners, not repaid, giving part-ownership and a claim on profit [1] [2] (b) 250,000 × 8% = 20,000 [1] [1] (c) 250,000 ÷ 10 = 25,000 shares [1] [1] (d) Total shares = 75,000 + 25,000 = 100,000 [1]; 75,000 ÷ 100,000 = 75% [1] [2] Examiner insight: For debt and equity, give a contrast on at least two features such as repayment and ownership. Two descriptions that never compare the two can leave marks unearned.

7. (a) 1,000 × 5% = 50 [1] [1] (b) 1,000 × 0.96 = 960 [1] [1] (c) 50 ÷ 960 [1] × 100 = 5.21% [1] [2] (d) The investor pays less than the nominal value [1] but still receives the same coupon, so the income is a larger percentage of the amount paid [1] [2] Examiner insight: Divide by the amount paid. Dividing by 1,000 gives the coupon rate, and the question asks for a different measure.

8. (a) Nominal value × 0.90 = 450 million [1], so nominal = 450 ÷ 0.9 = 500 million [1] [2] (b) 5% of 500 million = 25 million a year [1] [1] (c) 25 ÷ 450 [1] × 100 = 5.56% [1] [2] (d) 500 million, the nominal value [1] [1] Examiner insight: Government raises less than the nominal value when bonds sell below 100, but repays the full nominal value. Mixing the two figures is a common slip.

9. Savers want a return and the ability to get their money back; firms want long-term funds [1]. Financial markets bring them together, so savings flow to firms [1]. Secondary markets give liquidity, so savers lend for the long term [1]. Interest rates and share prices signal where funds are valued, steering finance to projects with high expected returns [1]. A lower cost of finance means more projects have an expected return above the cost of borrowing, so investment rises [1]. More investment raises the capital stock and, later, productive capacity [1]. [6] Examiner insight: This is a chain of reasoning question. Each step has to lead to the next, ending in investment. A list of roles with no links gains little.

10. For holders who sell before maturity, a rise in rates cuts the price, a capital loss [1]. The loss is small when maturity is near: 100 to 98.11 is about 1.9% [1]. It is larger for long maturity: 100 to 85.28 is about 14.7% [1], and the irredeemable bond loses a third [1]. Longer maturity means a bigger fall [1]. A holder keeping the bond to maturity still receives every coupon and the nominal value, so no loss is realised [1]. New buyers gain: they buy at a lower price and earn a higher yield [1]. Judgement: the claim is false as stated; harm falls on holders who must sell early and who hold long maturities, depending on when they need the money [1]. [8] Examiner insight: Evaluation here comes from using the data and separating types of holder. A one-sided “yes, prices fall” answer does not weigh the other cases.

11. Shares need no repayment and carry no fixed interest [1]; but they dilute existing owners’ ownership and control, and dividends are a continuing cost [1]. A bank loan keeps control and the interest is a known cost [1]; but payments are due whatever profit does, which raises risk [1]. Interest = 400,000 × 6% = 24,000 a year [1]. If profit before interest falls to 20,000, interest cover = 20,000 ÷ 24,000 = 0.83, so the firm could not meet interest from profit [1]. The choice depends on how stable profits are and how much the firm already owes [1]. Judgement: a firm with stable profit and a wish to keep control favours the loan; a firm with uncertain profit or high existing borrowing favours shares [2]. [9] Examiner insight: Reaching a judgement needs a condition, such as stability of profit or existing borrowing, rather than “it depends” alone.

Where marks are usually lost

• Saying money is “wealth” or “income” instead of a means of payment that people generally accept.
• Treating notes and coins as the only part of the money supply without noting that definitions vary.
• Splitting money and capital markets by the size of the sums.
• Using nominal value in the yield calculation when a price is given.
• Treating the coupon as something that moves with price.
• Giving the direction of the price change without the fixed coupon and new bonds in the explanation.
• Mixing up the amount raised, which depends on price, with the nominal value repaid.
• Listing the role of financial markets with no chain or evaluation.

Next steps

• Return to the revision notes and the study guide.
• Go to the AQA A-level Economics hub and tick off the printable checklist.
• Try the free 10-minute diagnostics for other topics, then read the exam preparation guide.
• Book a free trial class.

Official syllabus

AQA AS and A-level Economics specification, version 1.3 (29 June 2022), published by AQA: A-level content, The structure of financial markets and financial assets (4.2.4.1 in the combined PDF; 3.2.4.1 on the AQA website).