OCR A Level Economics: Financial institutions, markets and borrowing (H460) – 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 cover the role of the financial sector in the real economy in the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, macroeconomics content. No part of it carries a separate stage label. All data are invented and illustrative: Country C and its currency unit (cu) are fictional.

Read the study guide and revision notes first. See also the OCR Economics hub, the checklist and the free diagnostics.

Questions

1. A bond has a face value of 100 cu and pays a coupon of 6 cu a year. Calculate the current yield when its price is 75 cu and when it is 120 cu, and state the relationship between price and yield. [3]

2. A household buys a house for 150,000 cu with a deposit of 15,000 cu and takes an interest-only mortgage at 4.2%.

(a) Calculate the loan-to-value ratio. [2] (b) Calculate the monthly interest payment. [2] (c) House prices fall 10%. Calculate the household’s equity and explain one effect of falling house prices on the real economy. [3]

3. A pay day lender lends 400 cu for 20 days and the borrower repays 480 cu.

(a) Calculate the cost over the loan period as a percentage. [1] (b) Calculate the simple annualised rate. [2] (c) Explain why lenders charge such high rates. [2]

4. An insurer has 2,000 policies. Each has a 1.5% chance of a claim of 8,000 cu, and the premium is 150 cu.

(a) Calculate expected claims per policy and in total. [2] (b) Calculate expected profit. [1] (c) The claim chance rises to 2.5% for every policy because of a regional flood. Calculate the result and explain what this shows about pooling. [2]

5. A hedge fund has capital of 20 and holds assets of 120.

(a) Calculate its leverage. [1] (b) Calculate the return on capital if asset values rise 5% and if they fall 5%. [2] (c) Calculate the fall in asset values that wipes out its capital. [1] (d) Explain one risk to the real economy of highly leveraged funds. [2]

6. A lender requires an expected return of 6% and expects 5% of borrowers to default.

(a) Calculate the interest rate needed if nothing is recovered on default. [2] (b) Calculate the rate needed if 60% of the loan is recovered on default. [2] (c) State what the difference shows. [1]

7. Bank P lends 50m cu overnight to Bank R at 2.8% a year.

(a) Calculate the interest for one night. [2] (b) Calculate it if the rate were 4.0%. [1] (c) Explain why inter-bank lending might stop in a crisis and what follows for borrowers. [2]

8. A credit card balance is 1,200 cu. Interest is 2.5% a month and the minimum payment is 30 cu.

(a) Calculate the monthly interest. [1] (b) Calculate how much of the minimum payment reduces the debt. [1] (c) Calculate the effective annual rate to one decimal place. [2] (d) An overdraft of 800 cu is used for 45 days at 19.5% a year. Calculate its cost. [2]

9. Households in Country C hold shares worth 500m cu. Share prices fall 30%.

(a) Calculate the loss of wealth. [1] (b) Consumption falls by 5% of the lost wealth. Calculate the fall. [1] (c) Explain two other ways a fall in the stock market may affect the real economy. [4]

10. A good costs 60 cu. The exchange rate is 1 cu = 0.50 foreign currency units (fu), then the cu depreciates to 0.45 fu.

(a) Calculate the foreign price before and after. [2] (b) Calculate the percentage change. [1] (c) Explain why the effect on the trade balance is uncertain. [2]

11.

(a) Distinguish a retail bank from an investment bank. [2] (b) Explain how the investment decisions of a pension fund affect the real economy. [4]

12. Extract (invented): in Country C, bank lending to firms grew by 12% a year for five years, house prices rose by 60%, and household debt rose faster than incomes. Then banks tightened lending sharply, and investment fell by 18% in a year.

Evaluate the role of the financial sector in the real economy of Country C. [10]

Answers

1. At 75 cu: 6 ÷ 75 = 8.0% [1]. At 120 cu: 6 ÷ 120 = 5.0% [1]. Price and yield move in opposite directions because the coupon is fixed [1]. [3] Examiner insight: Show the division. A yield without the price used loses the link to the method.

2. (a) Loan = 150,000 − 15,000 = 135,000 cu [1]. LTV = 135,000 ÷ 150,000 = 90% [1]. [2] (b) 135,000 × 0.042 ÷ 12 [1] = 472.50 cu [1]. [2] (c) Value 135,000 cu, so equity = 0 [1]. Falling prices push borrowers into negative equity, and they cut spending to service debt [1]. Banks face losses if borrowers default, which reduces lending [1]. [3] Examiner insight: Answers that give the number and then follow it to consumption or lending tend to earn more than those that stop at the figure.

3. (a) 80 ÷ 400 = 20% [1]. [1] (b) 20 × 365 ÷ 20 [1] = 365% [1]. [2] (c) Default risk is high because borrowers have few other options [1]. Small, short loans have high admin costs per unit lent [1]. [2] Examiner insight: Put different loans on the same time basis before comparing. A 20% one-period cost is not the same as a 20% annual rate.

4. (a) 0.015 × 8,000 = 120 cu [1]. 2,000 × 120 = 240,000 cu [1]. [2] (b) Premium income 2,000 × 150 = 300,000. Profit = 300,000 − 240,000 = 60,000 cu [1]. [1] (c) Claims 2,000 × 0.025 × 8,000 = 400,000, so result = −100,000 cu [1]. Pooling relies on claims being independent. A shared event makes them move together, so the insurer cannot rely on averages [1]. [2] Examiner insight: Link the number to the idea. The loss is the evidence, and the explanation names correlated risk.

5. (a) 120 ÷ 20 = 6 [1]. [1] (b) 5% of 120 = 6, and 6 ÷ 20 = +30% [1]. A fall gives −30% [1]. [2] (c) 20 ÷ 120 = 16.7% [1]. [1] (d) Losses force fund sales, which push asset prices down further [1]. Banks that lent to the fund make losses and cut lending to firms and households [1]. [2] Examiner insight: A chain from forced selling to lending to the real economy shows more than saying leverage is risky.

6. (a) (1 − 0.05)(1 + r) = 1.06 [1]. r = 1.06 ÷ 0.95 − 1 = 11.6% [1]. [2] (b) 0.95(1 + r) + 0.05 × 0.60 = 1.06 [1]. 1 + r = 1.03 ÷ 0.95, so r = 8.4% [1]. [2] (c) Security lowers the rate needed by about 3.2 percentage points because the lender’s loss on default is smaller [1]. [1] Examiner insight: Use percentage points for a difference between rates. Writing percent suggests a relative change.

7. (a) 50,000,000 × 0.028 × 1/365 [1] = 3,835.62 cu [1]. [2] (b) 50,000,000 × 0.04 ÷ 365 = 5,479.45 cu [1]. [1] (c) Banks doubt each other’s solvency, so they refuse to lend or demand a high rate [1]. Banks then cut lending to firms and households, which lowers consumption and investment [1]. [2] Examiner insight: Name the lack of trust as the cause, then follow it outside the banking sector.

8. (a) 1,200 × 0.025 = 30 cu [1]. [1] (b) 30 − 30 = 0, so the debt does not fall [1]. [1] (c) (1.025)¹² − 1 [1] = 0.3449, so 34.5% [1]. [2] (d) 800 × 0.195 × 45 ÷ 365 [1] = 19.23 cu [1]. [2] Examiner insight: A nominal annual rate of 30% is not the effective rate. Show the compounding step.

9. (a) 500 × 0.30 = 150m cu [1]. [1] (b) 150 × 0.05 = 7.5m cu [1]. [1] (c) Firms find it harder and dearer to raise funds by issuing shares, so investment may fall [2]. Pension funds hold shares, so asset values fall and future retirement spending is reduced; confidence may also fall [2]. [4] Examiner insight: Each effect needs its chain. Naming an effect is only the start.

10. (a) 60 × 0.50 = 30 fu [1]; 60 × 0.45 = 27 fu [1]. [2] (b) (27 − 30) ÷ 30 = −10% [1]. [1] (c) The effect depends on how responsive demand for exports and imports is, so spending on exports may rise or fall [1]. Effects take time to appear, so the trade balance may first worsen [1]. [2] Examiner insight: Cheaper exports do not guarantee a better trade balance. Say what it depends on.

11. (a) A retail bank serves households and small firms with accounts and loans [1]. An investment bank issues and trades securities and advises large clients [1]. [2] (b) The fund collects contributions and buys bonds and shares [1]. This supplies long-term funds to firms and governments to finance investment [1]. Falling asset values reduce what the fund can pay out [1], which cuts future spending by retired households [1]. [4] Examiner insight: Define the institution, then explain its effect. Both parts are needed.

12. Lending to firms funded investment, which raises AD now and capacity later [1]. Rising house prices raised wealth and borrowing, so consumption rose [1]. Debt rising faster than incomes made households vulnerable [1]. Sharp tightening cut investment by 18% [1], which reduces AD and employment [1]. Evaluation: the effect depends on whether lending funded productive investment or only asset prices [1]. Leverage and household debt made the bust worse than the boom was helpful [1]. Long-run gains in capacity must be set against short-run instability [1]. More data on how much lending went into investment would help [1]. Judgement: the sector was useful but its benefit depended on stable, well-priced lending [1]. [10] Examiner insight: Use the figures in the extract. A verdict that states what it depends on is stronger than a one-sided or balanced-but-undecided list.

Where marks are usually lost

• Writing that bond prices rise when interest rates rise.
• Comparing pay day and bank rates on different time bases.
• Stating a result without following it to AD, AS or employment.
• Mixing up the retail, commercial and investment roles.
• Leaving out security when explaining why rates differ.
• Using percent when the question needs percentage points.
• Ignoring the data and giving generic points in the evaluation.

Next steps

• Re-read the revision notes and study guide.
• Open the OCR Economics hub and the checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class at /trial/.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, Macroeconomics: the financial sector, the role of the financial sector in the real economy.