1. Analyse the characteristics, features, behaviours and risks of securities and equities in the context of the market for these products (39) Flashcards

1.1 Analyse the characteristics, features, behaviours and risks of debt securities. 1.2 Analyse the characteristics, features, behaviours and risks of equities. 1.3 Explain the characteristics, features, behaviours and risks of the main competing asset classes and onshore/offshore investment products.

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1
Q

Types of physical replication

A
  • full replication
  • stratified sampling - sample
  • optimisation - complex sampling
  • synthetic - swaps
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2
Q

UK Gov bonds

A
  • Treasury bills - short term funding (1 3 and 6 m)
  • Gilts - fixed coupon and maturity date
  • Index-linked Gilts - RPI (future maybe CPH)
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3
Q

Gilts terms

A
  • Shorts - up to 7
  • Mediums - 7 to 15
  • Longs - 15 and more
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4
Q

US Gov bonds

A
  • Treasury bills - short term funding. less than a year. 28 - 182 days
  • Treasury notes - fixed coupon and maturity date. 2 to 10 years
  • Treasury bonds - notes but, 10 to 30 years
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5
Q

Jap Gov bonds

A
  • short - no interest. 6 and 1 year
  • medium - fixed coupon and maturity. 2 and 5 years
  • long - 10 years
  • super long - 20, 30 and 40. 15 year w floating interest
  • individual investor - conventional and floating. up to 10 years
  • inflation indexed - CPI. principal is inflation adjusted. coupon paid on inflation adjusted amount
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6
Q

DR - roles

A
  • Issuer - meets ongoing listing obligations
  • Depositary bank - makes a market. Holds shares as trustee. Converts and pays dividends
  • Custodian - holds shares on behalf of bank
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7
Q

Non current assets

A
  • Tangible - held for production or supply of goods. i.e. property and plant
  • Intangible - patents and trademarks
  • Long term investments - available for sale
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8
Q

Current assets

A
  • Inventories
  • Trade receivables - debtors who owe the company for goods or services
  • Cash
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9
Q

Calculating depreciation

A

original cost-expected residual value
/
expected useful life

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10
Q

Accounting for stock

A
  • FIFO - first purchased and sold
  • LIFO - most recent purchased first sold
  • weighted average
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11
Q

Characteristics of unit trusts

A
  • Legal structure - trust
  • Management - manager and trustee (legal owner)
  • Authorisation & supervision - FCA
  • Pricing and valuation - Daily / NAV; Single or dual
  • Charges - Initial; dual pricing may have AMC
  • Units - Income or ACC
  • Dealing and settlement - market provided by manager
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12
Q

Characteristics of OEICs

A
  • Legal structure - company
  • Management - ACD (management) and depository (legal owner)
  • Authorisation and supervision - FCA
  • Pricing and valuation - Daily / NAV; most uses single
  • Charges - initial; dilution levy for buys over certain amounts
  • Units - established under umbrella fund
  • Dealing - ACD provides market
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13
Q

Dual pricing

A
  • Bid - Price investor receives to sell
  • Offer - Price investor pays to buy
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14
Q

Risks associated with equities

A

Price risk
* share prices may fall (capital loss)
* disclosure of bad news
* tech companies (more volatile)

Liquidity risk
* difficuilt to sell at a resoanble price
* price spread from falling value
* smaller companies

Issuer risk
* company collaspes rednering shares worthless

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15
Q

Non current liabilties

A

Non-current
* borrowing that are not repayable in the next 12 months
* additional source of capiatal over and above shareholer capital
* debentures and unsercured loan capital / loans from banks etc.

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16
Q

Current liabailties

A

Current liabailties
* payble within 12 months of statement date
* owed to suppliers, trade creditors, overdraft, dividends and tax

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17
Q

Types of share capital and reserves

A

Share capital
* No of shares in issue
Capital reserves
* Revaluation reserve
* Share prem reserve
* Capital redemption reserve
Retained earnings - revene reserve

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18
Q

Key busines terms

A
  • Revenue - sales generated
  • Cost of sales
  • Gross profit - revenue, minus cost of sales
  • Operating profit - gross profit, minus distrubition costs and admin expenses
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19
Q

REIT

A

Tax exempt
* Distripute at least 90% of their net rental income
* Free of internal income tax and CGT
* Free of corp tax

Taxbale

20
Q

REIT distributions

A

Tax exempt
* classed as property income and paid net of 20% tax
* non tax payers can reclaim
* ISA investors can claim to have paid gross

Taxable
* Dividend payment taxed as normal
* Gains are subject to CGT

21
Q

Index linked bonds

A
  • Interest payments and redmeption are uplifted by inflation
  • RPI gilts / CPI corp bonds
  • Maturity increase depends on time at redemption
22
Q

Bond credit ratings

A

Investemnt garde
* triple B
* Baa

23
Q

Impact of econmic factors

A
  • Per capita income - larger potential tax base
  • GDP growth - higher better. decrease debt burden
  • Inflation - low means stable monetary and excchange policies
  • Economic developemnt
  • Current account - large acount. less dependent on foregin countries
  • Foriegn debt/ GDP
  • Real exchange rate
  • Default history
  • Ratio debt/ GDBP
  • Ratio reserves/import
24
Q

Unit trust or OEIC charges

A
  • Intial
  • AMC
  • Performance
  • Exit
25
Q

Top down active management

A
  1. Asset allocation
  2. Sector selection
  3. Stock selection
26
Q

Bottom up active management

A
  • Value - deep value through analysis
  • GAARP - long term sustainable advantages
  • Momentum - continue trend
  • Cotranism - against trend
27
Q

Characteristics of ETF

A
  • Legal structure - company
  • Management - ICVC
  • Authorisation & supervision - by regulator of domicle conuntry
  • Pricing and valuation - Daily / NAV; Single or dual
  • Charges - no intial & SDRT. lower TER. However, brokerage charges
  • Units - directly share
  • Dealing and settlement - stock exchange. trade close to NAV
28
Q

Fund of fund

A

Fund of funds

  • one overall manager
  • unferrered - undelrying external managers
  • fettered - same management group

Manager of managers

  • segregated mandates with appopinted managers
29
Q

Charectristics of the money market

A

Short term
* less than one year
* most between overnight and one week
Transactions
* high volume, low risk and short term
Particpiants
* gov, company
Instruments
* low risk, low yield, high liquidity

30
Q

covered warrant

A

similar to option but traded on stock exchange

  • call covered - right to buy at strike on expiry
  • put covered - right to sell at strike on expiry
  • expiry date - date after you can no longer excercise
  • strike price - excercise price for security

amercian or european

  • american - excervice up to and including expiry date
  • european - excervice only on expiry day
31
Q

Impact of economic factors

A
  • per capita income - larger potential tax base
  • GDP growth - economic growth. lower intr for borrower
  • inflation rate - sustainable monetary and exchnage rate policies
  • economic development - developed countries
  • current account - deficit implies reliance on foreign creditors
  • foreign debt/GDP - proportion of foreign debt to GDP indicates stability
  • real exchange rate - trade competitiveness
  • default history - affects reputation
  • ratio: debt/ GDP - greater ratio, greater compensation demanded
  • ratio: reserves/ imports - greater ratio, greater reserves to service foreign debts
  • ratio: investment/GDP - growth ability. larger potential tax revenue
  • rule of law - evaluting country governance and willingness to pay
32
Q

Types of ordinary shares

A

reedemable
* part of return to capital to shareholders
* b shares

a shares
* profs and divs as normal
* no voting rights

deffered shares
* issued to founders
* pay div after a certain period of years / other divs paid

33
Q

Types of shares

A
  • ordinary
  • Preference - div payment before all others
  • cumilitive pref - if unable to pay divs, carried forward
  • reedemable - company will buy pack after period or date
34
Q

Types of pref shares

A

non Cumulative pref share - fixed div. if not paid right is lost
Cumulative - if unable to pay divs, carried forward. arrears paid before all other divs
participating divs - additional divs if profs exceed certain level
reedemable - company buy back period or date
convertible - rights to convert pref shares to oridinary

35
Q

Ranking in liquidation

A
  1. secured creditors with fixed charge
  2. fees & charges of insolvency
  3. employees
  4. unsecured creditors - up to £600k ring fenced
  5. creidtors with floating charges (general not specific assets)
  6. unsecured - trade creditors, tax and unsecured loans
  7. sharegolders, pref first
36
Q

Role of DRs

A
  • issuer - lists and meets ongoing obligations
  • depositiary - makes market. holds shares as bare trustee (unless custodian). converts and pays dividends
  • custodian - holds undelrying shares on behalf bank
37
Q

Main types of corp bonds

A
  • med term notes - 9 ms to 5 years
  • fixed rate bonds - convential bonds with fixed rates
  • floating rate notes - variable rates linked to SONIA
  • convertible bonds - right to convert to ordinary shares
  • zero coupon bonds - no coupon, issued at a par for capital gain
  • PIBS - irredeemable. high semi annual coupons issued by bs. non cumilative. turn into PSBS after demutilisation. rank behind all other creditors
38
Q

STRIPS

A

Seperate trading of registered interest and principal

39
Q

Bond redemptions

A
  • call proviosions - issuer option to buy back (Call to return)
  • put provisions - holder option to sell back (Put for sale )
40
Q

Yield curves

A
  • normal yield curve - higher yield for longer bonds. compensate uncertainty
  • flat yield curve - no percieved risk over time. no compensation
  • inverted yield - omptimsitic inlfation. long yields below short
41
Q

Credit spread

A

Additonal yield demanded for an investor purchasing a corp bond rather than gov

42
Q

Risks associated with bonds

A
  • credit risk - interest and repyament deafualt
  • market or price risk - movements on intr have significant impact on bond value
  • unantciapited inflation risk - rising inflation erodes coupon and redemption payments
  • liquidity risk - difficult to realise at short notice. suffer wider than average dealing spreads
  • exchange rate risk - adverse currency moves for diff domicile bonds
  • early redemption risk - issuer may invoke call provision
  • senirotiy risk - ranking in issuers liquidation
43
Q

NS&I tax free products

A
  • Direct ISA - variable interest
  • Prem bonds - £50k max
  • Fixed interest savings certifcate - fixed return paid. up to 5 years
  • Index-linked savings certificate - as above. RPI linked
  • Childrens bonds
44
Q

Growth income bonds

A

paid net of tax
* guaranteed growth
* guaranteed income

paid gross
* income bonds

45
Q

Assesing default risk

A
  • credit rating
  • tier one capital rato - regulator use to judge adequacy of the banks capital position
  • creidt default swap (CDS) rates - pays out in the event of default by company or gov. compare against competitors
46
Q

Taxation of offshore funds

A
  • little to no tax internally

reporting - taxed as UK
* 60% holding in intr bearing. fund taxed as intr
* does not have to distribute
* normal CGT rules

non reporting funds
* roll up funds. income and divs accumulated
* gain taxed as income
* non domiciled. free of uk tax.escape IHT

47
Q

relationship betwen intetrest rates and bon prices

A

intr rise > prices fall
intr fall > price rise