1 - Cash investments and fixed-interests securities Flashcards
What are cash and fixed interest securities vulnearble to?
Inflation
In economic downturn what happens to equities
They generally lose value
When interest rates decline, what becomes more attractive and what becomes unattractive
Fixed interest bonds, equities attractive
Cash deposit unattractive
Why are cash deposits attractive
Emergency funds
Why arent cash deposit attractive
Little protection against inflation
What is the fixed terms range for deposits made in money market accounts
1 day - 5 years
Default risk: What are the two things that should be considered
- Creditworthiness of institution
- Compensation scheme
What are some examples of credit rating agencies (3)
Standard and Poors
Fitch Ratings
Moodys
FSCS (how much money is protected)
£85,000 per authorised institution
If a joint account is held in a bank how much can they receive from FSCS
Maximum compensation individually (£85,000 each)
If a deposit is held within a EEA branch of UK firm what does it do to FSCS
They will not be protected by FSCS rather EEA deposit guarantee scheme
How long will FSCS take to handle dispute and compensation
within 7 days of instiution failing
How long will FSCS take to handle compensation in complex cases
20 working days
What is interest rate risk
Variable interest rates - fluctuations (tends in cash deposits)
What is reinvestment risk (who does it affect)
Tends to affect fixed term deposits
What are some risk with offshore accounts
Exchange rates against interest rates
Inflation
Financial infrastructure
What is an instant access account
Normal current accounts for example
What is retricted access accounts (two examples)
Notice Accounts
Term deposit accounts
What is difference in notice account and instant access account
Pay higher variable interest than instant access account
Notice period (30-120 days) - to withdraw money
What is the difference in term deposit account with instant access accounts
1-5 year fixed rate interest (limited access to capital before maturity)
Rates offered driven by money market
What is structured deposit
What are some other names given to it?
Banks paying interest related to eithr greater than original investment or a % of change in FTSE 100
Guaranteed investment account
Deposit Plan
Whats the difference between structured deposit and structured product
How capital protection is provided.
Strucutred product relies on proteciton by third party who issues debt securities to be held witihn structured product wrapper, and so investor is exposted to risk of default by counterparty. whereas structured depoist firm has obligation to repay depositor
What is the minimum deposit for foreign currency deposit
$10,000 to $15,000 USD
What are some examples of tax havens for Sterling Deposit accounts
Channel Islands
Isle of Man
Are the offshore tax havens (sterling) protected by FSCS
NO
Are Individual saving accounts investments?
No they are a tax wrapper
If Cash Isas are invested to an indivdual under 18 and income is over £100 a year what happens
Income is treated as parents income so may not be tax free until child reaches 18
What are some products available from NS&I
Premium bonds
Green savings bonds
Direct saver accounts
Investment accounts
Guaranteed income and growth bonds
Income bonds
Direct ISas
Junior ISas
Is the Direct ISA offered by NS&I flexible
no
How is interest rate paid on NS&I accounts - are the taxed?
Interest rate is variable
Interest paid gross but is taxable
What are the two types of bank account NS&I
Investment account managed by post only
Direct saver that can be opened online or over phone
Who can have NS&I Savings certificaite
Only custoemers who have maturing certificates
What can the customers who have a NS&I Saving certificate do with their certificate
Renew up the total value of maturing certificate or cash some of investment and renew balance
What are the features of guaranteed income bonds
16+
1 year fixed term
min investment £500
interest paid once a month
What are the features of guaranteed growth bonds
16+
1 year fixed term
min investment £500
interest paid gross but taxable
What are the features of Green Savings bond
16+
4 fixed interest of 4.20%
3 year fixed term
Invest up to £100,000 per person
Interest added on anniversary
Why are the money market beneficial
Allows issuers to raise funds at relatively low interest rates
Allow borroers to botain funds for fixed period at fixed rates,,
lenders can have instant access to funds by selling security in market
What are the types of security traded in money markets
Treasury bills
Commercial bills
Certificates of deposits
What are treasury bills
Who are they managed by?
When are they issued
Issued by government to finance their short-term cash needs
Debt management office
Issued routinely weekly auctions
Treasury bills - when are the maturities
Typically one, three, six or twelve months (twelve months have not been held)
What is the price that members of public have to pay for treasury bills
They must purchase £500,000 from Treasury Bill Primary Participants
Do Treasury Bills pay interest
No, but they are issued at price that is less than par or face value and at maturity government pays holder full par value (IR is difference)
What are certificate of deposit?
Receipts from banks for deposits placed within them
What are the certificate of deposit interest related to
Sterling overnight index average (SONIA)
What is the maturity date of Certificate of deposits usually
1-3 months
Commercial Bills what are they
Short-term negotiable debt instruments issued by companies to fund day to day cash flow
What are the maturity dates for commerical bills
Why are they more volatile
30 - 90 days
Normally unsecured - compared to Treasury bills
What are the two types of money market funds
Short-term money market fund
Standard money market fund
What is short-term money market fund?
Invested in short term debt and money market instruments
Have weighted average maturity of <60 days
Weighted average life of <120 days
arket fun
What is standard money market funds
Higher returns
Invest in assets extended maturity between 6 - 12 months
What is the base rate of return on money market instruments
4.25%
What are the charges of money market fund
No initial charges - low annual charges of 0.15%
Fixed interest securities
Who are they issued by? Why are they issued
Issued by gov, corporations - to raise money to finance longer term borrowing requirementes
What are fixed interest securities described as
Negotiable fixed interest, long-term debt instruments
What is the long term part of fixed interest securities
Typically run between 2-30 years
What are bonds characterisitcs
Coupon - fixed interest
Par value - fixed redemtpion value
Redemption date - repaid after fixed period
What are the three features of a bond
- Issuer name
- Coupon
- Maturity date
What are bond prices quoted at
£100 nominal value
What affects the market price of £100 nominal value of bond
Price of which bond will be redeemed by issuer at redemption date
Amount of interest that will be received
Why does trading and prices in financial times of bonds not accurate
Does not reflect accured interest “clean prices”
Mid-market prices (midpoint between buying and selling prices quoted in market)
How often is interest paid on bonds
Twice a year
What is cum dividend bond
What does the buyer must do? They must pay
Purchaser receive full six month interest - even if bond was owned for less than period
Buyer has to compensate seller for interest that they were entitled to but did not receive
Buyer pay clean price plus interest that has accured from date of last interest payment up to settlement date (business day after purchase)
What is an ex dividend bond?
Interest payments are made whoever registered holder is
seven working days before interest payment date
If purchased after time(7 days) but before payment date - then it is bought ex without dividend, full six month interest is paid to seller
What is the negative if buyer purchases a bond after it goes ex dividend
Deprived of interest from the date of purchase to interest payment date (price is adjusted)
Interest in respect of period for which buyer owned bond but which was paid to seller is deducted from clean price
What is the dirty price in relation to bond
Amount paid by a purchaser - clean price +- interest adjustment
What are the two markets in bond
Primary
Secondary
What are the 4 markets for bonds (trading)
Government sector
Corporate sector
Sterling loans to foreign borrowers
The euroband market
What are some types of bond indices
FTSE Actuaries UK gilt index series (UK)
Bloomberg US aggregate bond index (US)
What are the two yields published in financial press
Interest yield
Redemption yield
What is interest yield formulae
(Coupon/clean price)*100
What is coupon paid on?
The nominal value of bond (£100). For example 8% coupon = returns of £8 py
What is redemption yield
A more accurate calculation of yield of bond - takes into account both income payments from bond and capital gain or loss from holding bond until maturity
Formulae for simplified redemption yield
interest yield +-( (gain or losses to maturity + number of years to maturity)/ clean price)) * 100
If redemption yield is greater than interest yield what happens
Bond will be priced below par , return will incorporate the gain if held until redemption
If redemption yield is less than interest yield what happens
Capital loss if bond is held until redemption date
Are corporate bonds and gilts taxable?
Yes through capital gains but income tax is liable
What are yields quoted against for index-linked bonds
RPI
With OEICs what is the difference to direct holdings in relation to income and maturity date
Income is rarely fixed
No maturity date
What happens to attractriveness level of bonds if IR increase
Bonds become less attractive (capital value of bond falls) and vice versa
What are the credit ratings offered by Standard and Poor range from
AAA (no risk)
AA+ - AA - (High rating)
A+ - A- (Adequate capacity
BBB + - BBB - (Speculative characteristics against changes in economic conditions)
BB+ - BB- (Non-investment grade (credit risk)
B+ - B - (Weak protection of interest and capital
CCC + - C (Low credit quality)
D (Credit default low prospect for recovery)
What are the credit ratings for moody’s
Aaa (no risk)
Aa1 - Aa3 (High rating)
A1-A3 (Adequate)
Baa1 - Baa3 (speculative characteristics)
Ba1 - Ba3 (Non investment grade)
B1 - B3 (WEAK PROTECTION)
Caa1 - Caa3 (Low credit quality)
C (defualt
What is investment grade bonds credit rating
BBB- or higher (standard and poor)
Baa3 - moody’s
What happens if an increasing balance of payments to bond prices
BP increase increase IR decrease bond
What are the most volatile bonds
Long period to maturity date and low coupons
Normal yield curve
Rising positive curve -> longer period of time held, higher yield
Flat yield curve
When economic factors are stable - yield curve flat
Inverted or reverse yield curve
Investors expect ir will fall in short term, while long term ir expected to be substaintially below current levels
Yield on longer term bonds is less than on short term bonds
Gilt periods
DMO definition
DMO definition
Short <7yrs
Medium between 7-15 yrs
Longs >15 years
Gilt period
Financial press definition
Short <5 years
Medium 5-15 yrs
Long >15 years
Index linked gilt before september 2005
When does RPI be used
RPI eight month before each payment date
Index linked gilt after september 2005
When does RPI be used
Three months before each payment date
What is redemption yield roughly for index -linked gilt roughly linked to inflation rate
3% inflation rate
What happens if owner does not repurchase stock on repo market
Repurchase transaction is cancelled. Stock becomes property of lender and can sell to release cash
What is the buyback period for repo market
Two weeks - can range from overnight to several months
What does BOE use the repo market for
To influence interest rates
What is strips market
Separate trading of registered interest and principal securities
What is stripping the process of
Process of separating conventional interest-bearing gilt into its individual interest and redemption payments which then can be separately held and traded
What are strips referred to
Zero coupon instruments
When are the two series of strippable gilts
First pays coupons 7 June and 7 December
Second pays coupons 7 March and 7 September
What is a debenture
Secured loan agreement between lender and borrower with business assets used as security
What will the agreement of a debenture include
IR, payment dates and redemption date
Assets backing debenture
Any conditions imposed on borrower
What can debentures be secured by
Fixed charge
Floating charge
What are Convertible bonds
Unsecured loan stock offering holder option of converting the bond into ordinary shares of issuing company
What happens if conversion of convertible bond does not take place by expiry date
Bond will recert back to conventional dated bond, company retains right to redeem any stock outstanding once a certain percentage has been converted
What is CGT relation to convertible bonds
Convertible bonds are subject to CGT
What are floating rate notes
Bonds issued by companies which pay interest rates linked to money market rate such as SONIA
What happens to the coupon on floating rate notes
reset every quarter to a specified level over reference rate
