01. Cash investments & fixed‑interest securities Flashcards
Name 5 risks that apply to cash deposits?
- Default risk.
- Inflation risk.
- Interest rate risk.
- Reinvestment risk.
- Shortfall risk.
What is default risk?
Risk that the financial institution becomes insolvent and is not able to repay the investor’s capital.
What is inflation risk?
Risk of both capital and interest being eroded by inflation.
What is interest rate risk?
Risk of interest rate worsening e.g. negative interest rates.
What is reinvestment risk?
Risk that it may not be possible to secure the same higher level of interest on reinvestment.
What is shortfall risk?
Risk that the investor’s investment objectives, e.g. saving for retirement, will not be met due to lack of capital appreciation.
What is the maximum compensation payable under the FSCS to cash depositors?
Up to 100% of the first £85,000.
Regarding FSCS compensation, the golden rule is not to have more than £___ with any one ___.
- £85,000
- institution
The FSCS target is for most depositors to be paid compensation within ___ days and the remainder within ___ working days.
- 7 days
- 20 working days.
What are 3 common dangers of investing in an offshore account?
- High interest rates may seem attractive, but are usually offered by high inflation countries with potentially collapsing currencies.
- Strong currencies do not strengthen continuously against sterling: they fluctuate. Currencies regarded as strong may not rise enough to compensate for their lower interest rates.
- May not be the same level of supervisory structure as the UK, meaning institutional collapse may be more likely.
What are the two types of restricted access account?
- Notice accounts.
- Term deposit accounts.
Structured deposits pay interest based on the performance of what?
An equity index (usually the FTSE 100).
The typical structure for structured deposits offers the investor a return over a fixed term, which is the greater of what 2 things?
- Their original investment; or
- A % (e.g. 110%) of the change in the FTSE 100 [a bet].
Structured deposits tend to require a commitment of how many years?
5 years or more.
Name 2 risks associated with structured products?
- Inflation risk (cash element).
- Counterparty risk (derivatives element).
To transfer from cash ISAs to stocks & shares ISAs or vice versa, individuals must be aged ___ or over.
18 years
When can investors contribute into Help to buy ISAs until?
30 November 2029.
Which NS&I products are tax-free?
Premium bonds.
ISAs.
Certificates.
Kids ISAs (JISAs).
NS&I Guaranteed Income & Growth Bonds have the following characteristics:
- investors must be aged ___ or over;
- there is a fixed term of ___ year;
- the minimum investment amount is £___;
- interest is paid ___ but is ___ and can be set against the ___.
- Income bonds paid ___ a month.
- 16 years
-1year - £500
- gross / taxable / PSA
- once
Green Savings Bonds have the following characteristics:
- investors must be aged ___ or over
- issue 4 fixed interest of ___%
- ___ year fixed term
- invest up to a total of £___ per person
- interest is added on each ___
- interest is paid ___ but is ___ and can be set against the ___.
- 16 years
- 4.20%
- 3 year
- £100,000
- anniversary
- gross / taxable / PSA
What are the 3 main types of securities that are traded in the money markets (wholesale)?
- Treasury bills.
- Commercial bills.
- Certificates of deposit.
Why are Treasury bills issued by governments?
To finance government’s ST cash needs.
Who manages the issue of Treasury bills?
DMO.
Treasury bills are routinely issued at ___ by ___ and can have maturities of up to ___.
- weekly auctions
- the DMO
- 12 months.
What is the minimum requirement for the purchase of nominal treasury bills by an individual?
£500,000 nominal of bills.
Do treasury bills pay interest?
No, they are priced at less than their par and at maturity the govt. pays the holder the full par value.
What are certificates of deposit (CDs)?
Receipts from banks for deposits placed with them.
CDs carry a ___ rate of interest, usually related to ___.
- fixed
- SONIA.
CDs have a ___ term to maturity but can be ___ in the money markets which makes the yields on CDs slightly ___ than on ordinary deposits.
- fixed
- traded
- less
Most CDs are issued with maturities of __ to ___, with the interest paid on maturity.
1 to 3 months
What are commercial bills?
ST negotiable debt instruments issued by companies to fund their day-to-day cash flows.
Is the market for commercial bills more or less liquid than the market for treasury bills?
Less.
Commercial bills are issued at a discount to their maturity value, with typical maturities of what?
Between 30 & 90 days.
Name 2 types of money market fund and briefly describe them.
-
Short-term money market fund:
weighted average maturity of no more than 60 days and a weighted average life of no more than 120 days. -
Standard money market fund:
aim to make slightly higher returns by investing in assets with extended maturity periods of six and twelve months.
Fixed-interest securities are issued by governments, companies and other official bodies as a method of raising money to finance what?
Their longer term borrowing requirements.
How long do fixed-interest securities typically run for?
Between 2 to 30 years.
Name 3 reasons why companies often raise long-term finance by issuing bonds rather than borrowing from banks.
- Bond market offers a wide range of lenders to tap into.
- Bonds are often the cheapest method of borrowing money.
- Banks may not be prepared to lend the amount required.
What are 3 common characteristics of bonds?
- Fixed rate of interest, known as the coupon.
- Fixed redemption value, known as the par value.
- Are repaid after a fixed period, at the redemption date.
The title of a bond will always give three key features:
- Issuer’s name.
- Coupon.
- Maturity date.
