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IRT > 1 - asset classes > Flashcards

1 - asset classes Flashcards

1
Q

AER? formula?

A

annual equivalent rate - tool for comparison rates
AER = (1 + (r / j)) ^j - 1

r=rate
j=number of compounding periods

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2
Q

NS&I tax summary

A

government backed risk free deposits
NS&I = agent of chancellor, accountable to treasury

interest paid gross but taxable = investment acc, direct saver acc, income bond, guaranteed income bond (no new), guaranteed growth bond (no new)

tax free, index linked saving certificate (no new), fixed interest savings certi (no new), JISA, DISA, premium bond

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3
Q

P2P lending
risks
returns and tax
regulation

A

risks - borrower default (loans pooled to diversify)
returns - higher APR compared to high streets, interest received gross and must be declared
regs - no FSCS, firms must be FCA regs

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4
Q

Gilts

A

UK gov bonds
coupon % - treasury - redemption date
coupon typically paid semi annually
nominal value - cap payment holder receives at redemption

UK gov issues gilts to finance its debt burdens
redemption date can be fixed, dual dated (redemption timeframe) or undated (no more floating in issue), dual dated=rare and undated no longer issued

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5
Q

what do gilts raise funds for

A

DMO issues gilts (part of treasury)

PSNCR = sum of (CGNCR + LGNCR + PCNCR)

PS = public sector
CG = central gov
LG = local gov
PC = public corp

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6
Q

Gilt categories?
duration?
types?

A

index linked
- coupon and redemption linked to RPI
- inflation protection (will fall with RPI too tho)

non-index linked
- shorts (<7 years to redem), meds (7-15), long (>15 years)

other:
convertible - owener can convert into predefined amounts of different giltin future, usually short to med term
floating - not in issue. pay variable coupons 4x year not semi annually

interest gross, taxable as savings income

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7
Q

why hold cash

A

liquidity
generally high security - FSCS
capital unlikely to be lost - but inflation erosion
interest payments to protect against this

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8
Q

Real returns

A

approx: real rate = nominal interest - rate of inflation

accurate - Fisher eq
R = [(1 + Ni)/(1+Infl)] -1

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9
Q

ZCB - zero coupon bonds
tax?

A

ay no interest, issued at a discount and redeemed at par
taxed as income no CGT

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10
Q

Treasury bills

A

UK T bills issued by DMO - short term lending
zero coupon debt security - issued at a discount and redeemed at par
baso - gov ZCB

maturities - 1 month, 3 month, 6 month, 12 months
min bid is 500k at tenders by investment banks - then subdivided and passed to clients

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11
Q

local authority bonds

A

rare - would usually seek via DMO LGNCR
2 cats; fixed stocks and yearlings/negotiable loans
interest paid gross
usually secured by charge over assets of issuing authority or old cases guaranteed by public works loan board (abolished 2020)

fixed stocks - not marketable must hold to maturity
yearings - life >2 years, issued at par and tradable

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12
Q

who issues foreign gov bonds
who are they issued to

A

central bank (US, france, germany)
ministry of finance (netherlands, china, japan)
DMO on behalf of gov (UK, ireland, sweden, portgual)

issued to specialist dealers (UK, US, germany, france) or syndicates of banks (switzerland)

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13
Q

US/Canada gov bonds

A

T - notes = maturity 1-10 years
T-bonds = maturity >10 years

sold at auction quarterly (T bonds and 10 year T notes) and monthly for other T notes

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14
Q

French gov bonds

A

France 2x
OATS - maturity 2-50 years, sold @ monthly auction
BTFS - T bills maturity <12 months

no floating or ZCB since 2013

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15
Q

German gov bonds

A

Germany - issued by Bundesbank
Bunds - 10-30 years maturiyt
Bobls 3-5 years
Schatz 2 years

mostly fixed rate
occasional floating

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16
Q

Italian gov bonds

A

Bearer variable dated bonds
BTPs - fixed rate, 3-30 years
CCTs - FRBs 7 year maturities
sold by centrla bank to dealers on fixed monthly date

ZCBs
BOTS - ZCBs w/ 90/180/360 day mats
CTZs - ZCBs w/ mats 18/24 months

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17
Q

Spanish gov bonds

A

BONOS - 3/5 year mats
oligaciones del estado - 10 year mats

sold by central bank at regular monthly date

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18
Q

Japanese gov bonds

A

usually mat = 10 years
20 available and sold by ministry of fin

LOTS of debt - 12 trillion $266% GDP

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19
Q

types of Corporate bonds (3x)

A

3x - debentures + loan stock + convertibles

Debentures - secured debt securities
against bis assets
fixed or floating charge -fixed typically against long term assets like land, floating typically short term like inventory, trade
lower interest (secured/lower risk)

loan stock
subordinated or unsubordinated

convertibles - converted later into another type of bond or equity

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20
Q

Tax on corp bonds

A

same as on gilts

no CGT on gains (unless convertible)
no SDRT on bond purchase (unless convertible)
coupons paid gross, subject to income tax as savings

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21
Q

domestic vs overseas corp bonds

A

domestic - UK company raising sterling on Uk debt market

foreign - UK company raises dollars on US debt market

eurobonds (international bonds) - bearer form corp bonds issued in a eurocurrency (one other than that of market in which bond is issued and than the market of the company)
- free of witholding taxes

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22
Q

PIBS

A

permanent interest bearing shares
Fixed interest security, issued by building societies, traded on the LSE by brokers
- Interest paid gross/taxable – twice a year
- No obligation to pay interest – non-cumulative
- Irredeemable – no fixed term
- In demutualisation PIBS convert to perpetual subordinated bonds (PSBs)
- No FSCS
- No CGT
- fairly illiquid

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23
Q

Bond risks

A

credit risk (issuer risk, default risk )
- baso 0 for gov bonds
- bigger for corp bonds, PIBS, local authority bonds

downgrade risk
- change sin credit rating

economic environment changes
- GDP/unemploument

liquidity risk
- more for small vol corp bonds

inlfation risk
- not issue for linker s

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24
Q

credit rating and investments

A

Fitch/ S&P
AAA - BBB = investment grade
BB - D = speculative grade

Moodys
Aaa - Baa = investment grade
Baa - C = speculative (institutional investors cannot hold)

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25
Q

interest rate sensitivity of bonds

A

typically for FixedCBs
interest rates rise = bond price typically falls, but coupons can be reinvested at higher rate
interest rates fall = coupons reinvested at lower rates but bond prices typically rise

26
Q

Macaulay duration

A

duration measures the sensitivity of a bond’s price to changes in interest rates
Macaulay duration = weighted average time before bondholder recieves bonds cash flows
weighted average term to maturity of cash flows from a bond

= sum ( net present val of bonds cash flows x time to cash flow receipt) / sum net present cash flows

27
Q

modified Macaulay duration

A

modified mac duration = approx % change in bond price for 1% change in yield
allows measurement of sensitivity of bond to changes in interest rates
longer maturity and lower coupon % = more sensitive

= mac duration / (1 + GRY)

28
Q

RY/running yield/ flat yield/ income yield

A

pre tax annual return
uses: income seeking non-tax payers
irredeemable bonds

RY = gross annual coupon / market price

gross annual coupon = CR x PAR

29
Q

Nominal yield

A

gross annual coupon / nominal value

30
Q

GRY

A

GRY = YTM
pre-tax annualized return on coupon, capital and investment

GRY = %RY + %profit(loss) at redemption

% profit/loss @ redemption = (NV - MV)/MV
%RY = gross annual coupon / market price

31
Q

Primary market dealings in UK gov debt secs

A

via DMO @ electronic blind auction
either competitive or non competitive

competitive (usually invest banks)
- priced bids for at least 1 mil ranked high to low
- pay bid price if successful

non competit (usually firms/individuals)
- non priced bids between 1k - 500k nonimal val
pay volume weighted avg of succesful competitive bids (bid 4 volume not price)

32
Q

secondary market dealings UK debt secs

A

via stockbroker or via DMO gilt purchase and sale (small vols)
LSE ORB for gilts (settle T+1) and corp (settle T+2)

33
Q

clean and dirty prices debs secs

A

dirty price = clean price + accrued interest
accrued interest = fraction of coupon already earned by seller

similar to equalization payments for funds

34
Q

bond indices
types
features
included/excluded

A

by bond type, by credit rating, by mat date

features: most use market cap weighting
usually total return index not capital index

includes:
straight bonds, strippable bonds

excludes: coupon strips, index linked, convertibles, bonds with embedded options

35
Q

why invest in bonds

A

steady cash flows
liability matching (through strips)
diversification
higher interesting than savings acc
less volatile than shares
relatively safe return of principle (if bought @PAR)

36
Q

disadvantages of bonds

A

conventional = not inflation hedge
high duration fluctuates with interest
lower risk - lower return than shares typically

37
Q

types of share

A

ordinary = common stock
variable, discretionary divi
maybe voting rights
separated into classes with different rights

preference = preference stock
fixed divi
generally no voting
can be convertible with option to convert to common

38
Q

order of payments debt and equity
risk?

A

debentures (Secured debt)
loan stock (unsecured holders, junior then subordinated debtors)
tax
preference shareholders
ordinary shareholders

debt = less risky than equity as paid first but lower returns
equity = more risky than debt as divi not guaranteed but higher return

39
Q

equity risk features

A

Capital risk
Income risk (divis discretionary)
Liquidity risk
Volatility
Issuer risk
Market risk

40
Q

capitalization aka bonus issue aka scrip issues

A

increase no. of shares in issue without raising more money
issued on pro rata basis to shareholders
successful bis with high share price becoming illiquid

improves liquidity
balance sheet not affected
investor total equity worth same amount
share price falls

41
Q

rights issues

A

raise more equity capital following IPO
new shares issued, existing holders have right to participate to protect from dilution
can sell right - receive nil paid amount to compensate for fall in share price
lapse - receive nil paid

nil paid = TERP (theoretical ex rights price) - subscription price (new price offered)

42
Q

purchase costs for shares

A

spread between bid/offer = market makers profit
brokers commission
stamp duty/SDRT = 0.5% (if via CREST rounded to nearest 1p, paper ased round up to nearest £5 if over 1k)
panel on takeovers and mergers levy (£1 on sales/purchases over £10k paid by both seller and purchaser)

43
Q

cum div vs ex div

A

cum div = buyer entitled to next divi
ex -div = seller entitled to next divi

ex div date -typically 1 days before record date as settlement is T+2
record date = fri typically so ex div is thurs before

44
Q

EPS

A

EPS = net income / no. of outstanding ordinary shares
net income = earnings/profit available to ordinary shareholders
EPS steady growth indicates successful consistent company

45
Q

PE ratio

A

PE ration = price per share / earnings per share

relative valuation multiple
can gage relative valuations

EPS = net income/ no. of outstanding ordinary shares

46
Q

Earnings yield

A

= EPS / share price

= (net income / no. of ordinary shares)/ share price

47
Q

enterprise value

A

EV = market cap + market val of pref shares + market val of debt + minority interest - cash and cash equiv

EV = theoretical cost of takeover
measure of what market believes ops of company is worth

48
Q

Dividend yield

A

DY = div per share / market price per share

UK = gross usually but can be net
measures income return from shares
growth companies have lower DY as mosre income reinvested, value have higher DY

49
Q

dividend cover

A

DC =net income / common div
Indicates sustainability of the dividend, or the likelihood of the existing dividend being maintained
Literally, how many times a company could have paid its
dividends
Indicates how much profit is re-invested

50
Q

gearing ratio

A

gearing ratio = LT liabilities / capital employed

cap employed = LT liabilities + equity

Debt is riskier (from the issuers’ point of view) than equity as it typically requires fixed and obligatory interest payments
The higher the proportion of debt a company has the greater the risk to shareholder dividends

51
Q

NAV

A

NAV = (assets - liabilities) / shares in issue

commonly used to calue investments in collectives

52
Q

adv vs disadv of investing in equities

A

Advantages
Strong returns over long-term, inflation hedge, liquidity

Disadvantages
-Volatility, risk of firms failing, smaller companies have increased risk

53
Q

adv vs disadv of direct property investment

A

Advantages
-diversification - Another asset class
- Rental yields giving real returns
- long-term appreciation in values

Disadvantages
- Illiquidity and transaction costs
- Cyclicality
-Possible depreciating values
- Quality of tenants
- Maintenance costs
- Void periods
- Stamp duty land tax (SDLT)

54
Q

property unit trustes and OEICs

A

type of indirect prop investment - open ended

Invests directly into commercial property and property company shares
Diversified portfolio of commercial property for investor (max 15% allocation for single prop)
Less liquid than listed funds

55
Q

PAIF

A

type of indirect prop investment - property authorized investment funds
type of property OEIC

Direct investment in property
* Property income is ring fenced within the funds, tax exempt
* All other income is subject to corporation tax at 20%
- The fund pays out three types of income: Property income (net of basic), other taxable income (franked, gross), and UK divi

  • In order to qualify as a PAIF, the fund must meet the following criteria:
  • Structured as an OEIC
  • 60% of net income is derived from the property investment business
  • 60% of the total assets are derived from the property investment business
  • No corporate investor can hold 10% or more of the PAIF shares
56
Q

investment trust companies - indirect prop investment

A

closed ended property funds

property investment trusts
-invests in shared only not property directly
liquid
ITC no CGT

REITS
- direct prop investment 75% minimum
- gearing (open funds cannot gear)

57
Q

are foreign gov bonds registered or bearer

how is interest paid on them?

A

can be registered or bearer (anonymous with no register) - some european, central and s american countries allow bearer bonds but not common because tax evasion

interest is semi annual (UK, US, Japan) or annual (france, germany, netherlands, spain, belgium)

US quote in fraction - rest of the world in decimals

58
Q

bonus issue vs rights issue

A

bonus issue
- dont raise new money
- increase no. of shares in issue
-lowers share price

rights issue
- raise new money
- increase number of shares - underwriting
- price below current market price

59
Q

bonus issue vs rights issue

A

bonus issue
- dont raise new money
- increase no. of shares in issue
-lowers share price

rights issue
- raise new money
- increase number of shares - underwriting
- price below current market price

60
Q

PAIF

A

rental profits and related income distributed gross
direct investment in prop
property income ring fenced in fund
CT 20%

must be:
structured as OEIC
60% net income from property
60% assets in property business
no corp investor can hold >10%

61
Q

REIT

A

direct investment in prop
>90% profits distributed - no CGT or CT paid by REIT
>75% total assets helped in real estate
no single shareholder >10%
val of one prop can’t exceed 40% total val
>75% total income rental income

IRT (9 decks)

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