Mrs Ho wishes to buy a home cinema system costing $5000.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2013). The mark or mark type is shown in brackets.

1. [2] (a) For each part question any two points × 1 mark each or one well explained point × 2 marks – (i) immediate ownership; may be given discount; it is legal tender so has to be accepted
2. [2] (a) (ii) can postpone payment; accepted by many retailers; safer to carry than a large amount of cash; offers free credit for at least a month
3. [2] (a) (iii) can use the home cinema system before she has paid for it; can budget for this expensive item over a period of time; may receive better after-sales service from retailer; can return it if unable to keep up the payments; any other relevant point
4. [4] (b) Any four factors × 1 mark each or two well explained factors × 2 marks each – the amount to be paid – the cinema system is very expensive and the total amount may not be available; whether or not Mrs Ho has a credit card and the credit card limit; how credit worthy Mrs Ho is – may be refused hire purchase; additional costs involved – interest will be paid using hire purchase, interest will be charged if the debt is not paid off by the due date using the credit card; safety and security – cash is a riskier means of payment; acceptability of the means of payment to the retailer – may not offer hire purchase; how quickly Mrs Ho wants to purchase the cinema system; any other relevant factor
5. [6] (c) Level 2 (4-6 marks) Has discussed both the loan and overdraft and has made a reasoned recommendation. (If a candidate has discussed only one source of finance, award 4 marks max.) Mr Bin might take a loan to buy the car because a bank loan is suitable for a set purpose and the vehicle could be used as collateral against the loan. A loan is a formal method of borrowing and the interest is fixed so Mr Bin will know how much he has to repay. He is likely to repay monthly from his current account and a loan account will be opened. Mr Bin could use an overdraft to fund the purchase of the car. He obviously has a current account and an overdraft facility on this account. Interest at a variable rate would be charged on the overdrawn amount so an overdraft would be suitable if Mr Bin knew that he was likely to receive a large sum of money at a later date. The overdraft may be riskier because it could be recalled by the bank at very short notice. I would recommend that Mr Bin uses the bank loan. The car is likely to be expensive and so he may find the cost of borrowing cheaper than using an overdraft. His overdraft limit may not be sufficient to pay for the car or he may need to use an overdraft for some emergency expenditure. Level 1 (1-3 marks) Has commented on the use of a loan and/or an overdraft with/without a recommendation. I would recommend that Mr Bin uses an overdraft. An overdraft is on a current account. Mr Bin has a current account. The interest paid varies. Sometimes Mr Bin may be overdrawn. Sometimes he may be in credit. It will be easy to buy the car.
6. [4] (d) Any four points × 1 mark each or two well explained points × 2 marks each – payment is guaranteed and there would be no bad debts; receives immediate payment so the money can be used for other purposes/buying stock; saves handling other means of payment e.g. cheques or credit cards; can offer a cash-back scheme to customers; saves having large amounts of cash on the premises so less danger of theft; any other relevant point NB may attract more customers = 0 marks