1 - Asset Classes (14/80) Flashcards
Stamp Duty Land Tax Bands
0% on first £125,000
2% on the £125,000 - £250,000
5% on £250,000 - £925,000
10% on £925,000 - £1,500,000
12% on >£1,500,000
Stamp Duty Land Tax for Investment Companies
15% if costing more than £500,000
A fund whose unit/share price does not change during its life
Constant net asset value fund
Retail Bond settlement time
T + 1
Offer For Sale
Purchase of bonds by a bank syndicate (underwriting)
Terminal Wealth
Capital x (1 + r/Nj) ^ Nj
N = years j = times interest paid per year r = interest rate
Annual Equivalent Rate
Takes into account how often interest is paid. More often = higher effective rate
Savings Tax Allowances
Basic rate = £1000
Higher rate = £500
Additional rate = £0
Starter Rate = £5,000 above income tax personal allowance
Real Rate
Nominal Rate - Inflation Rate
(or)
(1 + Nominal) / (1 + Inflation) - 1
Requirement-linked accounts
Accounts w/ higher rates but balance/time requirements
Cash risks
Capital
Inflation
Interest rate
Operational
FOS Compensation
£355,000 after April 2020
£350,000 2019-2020
£160,000 before
FSCS Compensation
£85,000 per account
Types of Deposit Account
Current Instant access Notice Fixed rate Term Money market
NAV Types of Money Market Funds
- Constant NAV - income paid out or buys more units (face value is constant)
- Accumulating NAV - income accumulates and increases NAV
Cash benchmarks
LIBOR - rate banks take deposits from each other
LIBID - rate banks lend to each other
Replaced by Sterling Overnight Index Average (SONIA)
Commercial paper
Short-term corporate debt
Backed by assets
Can roll over into longer term
Gives access to funding
P2P Lending
Default risk - spread out among many small lenders
Liquidity risk
Returns higher than others
Not guaranteed by FSCS
Debt Management Office
Issue government bonds/gilts
Buy through Computershare
Gilts
Government bonds issued by the Debt Management Office
Used to cover ‘Central Gov. Cash Requirement’
-> Part of PSNCR (public sector)
Gilt types
Index-linked (linker)
Convertible - can change terms
Floating rate
Bulldog bond
Sterling-denominated bond issued by a foreign issuer
Index-Linked Bonds
Usually tied to inflation
YTM considered to be real yield (inflation baked in)
Treasury Bills
Issued by DMO
Zero-coupon
Min. £500,000
Usually <6 months
Types of Corporate Bond
Debentures - secured by assets
Convertibles - can be converted to shares (price diff = premium)
Eurobonds
Any bond issued in a different country from the issuer
Floating Rate Notes
Bond with a variable coupon
Tied to a benchmark; usually 3 year terms
Contingent Convertibles
Convert due to a specific event e.g. share price hitting X
Running Yield / Interest Yield
Gross Coupon / Bond Market Price
Doesn’t include capital gains/losses
Yield to Redemption / Yield to Maturity
[Coupon / Bond Market Price] + [CG / Years to Maturity]
CG = (Par - Bond Market Price) / Bond Market Price
Includes income and capital gain / loss
Duration
Price sensitivity of bonds
% price change = -(duration x % change in yield)
Yield Curve
Normal = upwards parabola (interest rates increase w/ maturity)
Flat = no change with maturity (rates expected to fall)
Inverted = downwards parabola (inflation and rates expected to fall)
Fixed Income Risks
Liquidity Interest rate Inflation Issuer Credit rating Credit enhancement (risk may be passed on)
Capital Structure Seniority
- Unsubordinated debt
- Subordinated debt
- Preference shares
- Ordinary shares
Clean vs dirty bond price
Clean price = without accrued interest (accrued = x/365)
Dirty price = Clean price + ( [coupon/period] x [days since coupon/days between coupons] )
Period usually = 2 as paid twice a year
i.e. usually: (coupon/2) x (days/183)
Bond indices
Harder to create than equities due to huge universe
Pricing:
capital index (clean price)
or
total return index (YTM)
Weighted by issuance value
FTSE Global Bond series
Ordinary share
Voting rights
Lowest in seniority
Redeemable shares
Agreed to buy back at a certain date
Dual-class shares
Different voting rights and dividends (Class A, B etc.)
Good for founders retaining control
Deferred dividend shares
Dividends paid on certain conditions
Deferred ordinary shares (founder shares)
Usually given to founders/execs
No dividend until others are paid
Larger portion of profits later
Preference shares
More rights and security/seniority
First access to dividends before ordinary shareholders
Cumulative dividends (rolls over) Non-cumulative dividends Participating (fixed dividend w right to more profits) Redeemable Convertible
Types of Private Equity
LBOs Venture capital Growth capital Distressed Mezzanine (incl. bridging) - sits in subordinated and preference
Equity risks
Liquidity
Growth
Volatility
Issuer/company
Capitalisation issue / ‘bonus’ issue
Issue shares to clean balance sheet and increase marketability
e.g. 1-for-4 shares issued from reserve share capital, so shouldn’t dilute share price
Ex-Cap price tends to fall as new shares have no value
Stock split
Share price split into X amount of smaller shares
Rights issue
Ask investors to buy more shares at a discount (give them the right)
Usually one-for-many e.g. 1:3 means 1 share for every 3 owned
Ex-rights price = weighted average of old price and rights issue price
OTC
Bilateral contract
Usually forwards/swaps
Multilateral trading platform
Software matches multiple buyers and sellers
‘Organised trade facilities’ a type of MTP - derivatives, structured products etc.
Cum and Ex-Dividend Prices
Cum = prices slightly higher due to carrying right to dividend Ex = no dividend; usually a week before dividend is issued
Equity indices
Market-cap weighted
Price-weighted
Equal-weighted
Price return
Total return
Net total return (after taxes)
Equity Metrics
Dividend Yield = Dividend / Share Price
(calculated after profits paid to preferred shareholders)
EPS = Earnings / Share #
Price to Equity = Share Price / EPS
Dividend Cover = EPS / Div. per Share (<1.5 considered too low)
Gearing = Liabilities / Capital Employed
Enterprise Value = MV + Debt - Cash (value if sold)
Fund costs
Initial / load costs Annual management costs Ongoing charges (comm, accounting etc.) Performance charges Exit charges Unquoted charges (trading, spreads etc.)
ETF creation
Created by buying securities and exchanging them for a ‘creation basket’. Shares are then sold on exchanges.
Cheaper, more liquid, daily pricing etc. than mutual funds
Property performance factors
Business cycle
GDP
Inflation
Property ownership structures
Freehold
Leasehold
Commonhold
Property Valuation
Rental/Initial Yield = Rent / Total Cost
Cap Rate = [All Income - Expenses] / Total Cost
Reversionary Value = value at end of the lease
Other assets (art, antiques, metals etc.)
Lower liquidity
High dealer fees
Storage costs
Prices change with trends
But they can be FUN to collect
Stepped Preference Shares
Offer capital growth with predetermined redemption value at wind-up
Good for growth
Premium Bonds
Guaranteed by government
Chance to win up to £1m every month
34,500 to one chance of winning for every £1
Min £25
Max £50,000
Overdraft fees
Excessive fees banned in 2020
Single interest rate
NS&I products
No CGT liability
Some have income tax liability
NS&I products with income tax
Investment account Direct Saver account Guaranteed income bond Income bond Guaranteed growth bond
Changing inflation measures
Government moving RPI in line with CPIH by 2030
French bonds
OATs = 2-50 years BTFs = <12 months
German bonds
Bunds = 10-30 years Bobls = 3-5 years Schatz = 2 years
Italian bonds
BTPs = 3-30 years CCTs = 7 years
Spanish bonds
BONOs = 3-5 years OES = 10 years
Japanese bonds
JGBs = 10 years
Some ‘super long’ are 20 years
International Order Book
Tap into world markets with one order book
SETS and SEAQ
SETS = platform/order book for FTSE-listed and top 150 AIM shares
SEAQ = non-online book used by market makers for firms not accessed by SETS
International Board trading service
UK-Singapore agreement
Used to trade STI 30 and MSCI Singapore
Residential vs Commercial Property - Repairs
Residential = landlord responsible
Commercial = tenant responsible
Residential vs Commercial Property - Leases
Residential = short, void periods
Commercial = long; 10+ years
Property ‘scenarios’ (best, worst)
Best = high growth, low inflation, low rates
Worst = opposite
High GDP growth is beneficial unless inflation is also high
Property Authorised Investment Funds (PAIF)
Invest in property and REITs
Property income exempt from income tax
Disposals taxed as CGT (not income like REITs)
Must distribute 100% of rent (not 90% like REITs)
>60% of income from property
>60% of NAV from property
Shares must be widely held
