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.
Types of physical replication
- full replication
- stratified sampling - sample
- optimisation - complex sampling
- synthetic - swaps
UK Gov bonds
- Treasury bills - short term funding (1 3 and 6 m)
- Gilts - fixed coupon and maturity date
- Index-linked Gilts - RPI (future maybe CPH)
Gilts terms
- Shorts - up to 7
- Mediums - 7 to 15
- Longs - 15 and more
US Gov bonds
- 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
Jap Gov bonds
- 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
DR - roles
- 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
Non current assets
- Tangible - held for production or supply of goods. i.e. property and plant
- Intangible - patents and trademarks
- Long term investments - available for sale
Current assets
- Inventories
- Trade receivables - debtors who owe the company for goods or services
- Cash
Calculating depreciation
original cost-expected residual value
/
expected useful life
Accounting for stock
- FIFO - first purchased and sold
- LIFO - most recent purchased first sold
- weighted average
Characteristics of unit trusts
- 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
Characteristics of OEICs
- 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
Dual pricing
- Bid - Price investor receives to sell
- Offer - Price investor pays to buy
Risks associated with equities
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
Non current liabilties
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.
Current liabailties
Current liabailties
* payble within 12 months of statement date
* owed to suppliers, trade creditors, overdraft, dividends and tax
Types of share capital and reserves
Share capital
* No of shares in issue
Capital reserves
* Revaluation reserve
* Share prem reserve
* Capital redemption reserve
Retained earnings - revene reserve
Key busines terms
- Revenue - sales generated
- Cost of sales
- Gross profit - revenue, minus cost of sales
- Operating profit - gross profit, minus distrubition costs and admin expenses
REIT
Tax exempt
* Distripute at least 90% of their net rental income
* Free of internal income tax and CGT
* Free of corp tax
Taxbale
REIT distributions
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
Index linked bonds
- Interest payments and redmeption are uplifted by inflation
- RPI gilts / CPI corp bonds
- Maturity increase depends on time at redemption
Bond credit ratings
Investemnt garde
* triple B
* Baa
Impact of econmic factors
- 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
Unit trust or OEIC charges
- Intial
- AMC
- Performance
- Exit
Top down active management
- Asset allocation
- Sector selection
- Stock selection
Bottom up active management
- Value - deep value through analysis
- GAARP - long term sustainable advantages
- Momentum - continue trend
- Cotranism - against trend
Characteristics of ETF
- 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
Fund of fund
Fund of funds
- one overall manager
- unferrered - undelrying external managers
- fettered - same management group
Manager of managers
- segregated mandates with appopinted managers
Charectristics of the money market
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
covered warrant
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
Impact of economic factors
- 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
Types of ordinary shares
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
Types of shares
- 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
Types of pref shares
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
Ranking in liquidation
- secured creditors with fixed charge
- fees & charges of insolvency
- employees
- unsecured creditors - up to £600k ring fenced
- creidtors with floating charges (general not specific assets)
- unsecured - trade creditors, tax and unsecured loans
- sharegolders, pref first
Role of DRs
- 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
Main types of corp bonds
- 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
STRIPS
Seperate trading of registered interest and principal
Bond redemptions
- call proviosions - issuer option to buy back (Call to return)
- put provisions - holder option to sell back (Put for sale )
Yield curves
- 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
Credit spread
Additonal yield demanded for an investor purchasing a corp bond rather than gov
Risks associated with bonds
- 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
NS&I tax free products
- 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
Growth income bonds
paid net of tax
* guaranteed growth
* guaranteed income
paid gross
* income bonds
Assesing default risk
- 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
Taxation of offshore funds
- 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
relationship betwen intetrest rates and bon prices
intr rise > prices fall
intr fall > price rise
