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R02 - 2023 > 1 - Cash investments and fixed-interests securities > Flashcards

1 - Cash investments and fixed-interests securities Flashcards

1
Q

What are cash and fixed interest securities vulnearble to?

A

Inflation

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2
Q

In economic downturn what happens to equities

A

They generally lose value

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3
Q

When interest rates decline, what becomes more attractive and what becomes unattractive

A

Fixed interest bonds, equities attractive
Cash deposit unattractive

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4
Q

Why are cash deposits attractive

A

Emergency funds

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5
Q

Why arent cash deposit attractive

A

Little protection against inflation

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6
Q

What is the fixed terms range for deposits made in money market accounts

A

1 day - 5 years

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7
Q

Default risk: What are the two things that should be considered

A
  1. Creditworthiness of institution
  2. Compensation scheme
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8
Q

What are some examples of credit rating agencies (3)

A

Standard and Poors
Fitch Ratings
Moodys

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9
Q

FSCS (how much money is protected)

A

£85,000 per authorised institution

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10
Q

If a joint account is held in a bank how much can they receive from FSCS

A

Maximum compensation individually (£85,000 each)

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11
Q

If a deposit is held within a EEA branch of UK firm what does it do to FSCS

A

They will not be protected by FSCS rather EEA deposit guarantee scheme

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12
Q

How long will FSCS take to handle dispute and compensation

A

within 7 days of instiution failing

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13
Q

How long will FSCS take to handle compensation in complex cases

A

20 working days

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14
Q

What is interest rate risk

A

Variable interest rates - fluctuations (tends in cash deposits)

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15
Q

What is reinvestment risk (who does it affect)

A

Tends to affect fixed term deposits

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16
Q

What are some risk with offshore accounts

A

Exchange rates against interest rates
Inflation
Financial infrastructure

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17
Q

What is an instant access account

A

Normal current accounts for example

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18
Q

What is retricted access accounts (two examples)

A

Notice Accounts
Term deposit accounts

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19
Q

What is difference in notice account and instant access account

A

Pay higher variable interest than instant access account
Notice period (30-120 days) - to withdraw money

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20
Q

What is the difference in term deposit account with instant access accounts

A

1-5 year fixed rate interest (limited access to capital before maturity)
Rates offered driven by money market

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21
Q

What is structured deposit

What are some other names given to it?

A

Banks paying interest related to eithr greater than original investment or a % of change in FTSE 100

Guaranteed investment account
Deposit Plan

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22
Q

Whats the difference between structured deposit and structured product

A

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

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23
Q

What is the minimum deposit for foreign currency deposit

A

$10,000 to $15,000 USD

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24
Q

What are some examples of tax havens for Sterling Deposit accounts

A

Channel Islands
Isle of Man

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25
Q

Are the offshore tax havens (sterling) protected by FSCS

A

NO

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26
Q

Are Individual saving accounts investments?

A

No they are a tax wrapper

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27
Q

If Cash Isas are invested to an indivdual under 18 and income is over £100 a year what happens

A

Income is treated as parents income so may not be tax free until child reaches 18

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28
Q

What are some products available from NS&I

A

Premium bonds
Green savings bonds
Direct saver accounts
Investment accounts
Guaranteed income and growth bonds
Income bonds
Direct ISas
Junior ISas

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29
Q

Is the Direct ISA offered by NS&I flexible

A

no

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30
Q

How is interest rate paid on NS&I accounts - are the taxed?

A

Interest rate is variable
Interest paid gross but is taxable

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31
Q

What are the two types of bank account NS&I

A

Investment account managed by post only
Direct saver that can be opened online or over phone

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32
Q

Who can have NS&I Savings certificaite

A

Only custoemers who have maturing certificates

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33
Q

What can the customers who have a NS&I Saving certificate do with their certificate

A

Renew up the total value of maturing certificate or cash some of investment and renew balance

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34
Q

What are the features of guaranteed income bonds

A

16+
1 year fixed term
min investment £500
interest paid once a month

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35
Q

What are the features of guaranteed growth bonds

A

16+
1 year fixed term
min investment £500
interest paid gross but taxable

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36
Q

What are the features of Green Savings bond

A

16+
4 fixed interest of 4.20%
3 year fixed term
Invest up to £100,000 per person
Interest added on anniversary

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37
Q

Why are the money market beneficial

A

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

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38
Q

What are the types of security traded in money markets

A

Treasury bills
Commercial bills
Certificates of deposits

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39
Q

What are treasury bills

Who are they managed by?
When are they issued

A

Issued by government to finance their short-term cash needs
Debt management office
Issued routinely weekly auctions

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40
Q

Treasury bills - when are the maturities

A

Typically one, three, six or twelve months (twelve months have not been held)

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41
Q

What is the price that members of public have to pay for treasury bills

A

They must purchase £500,000 from Treasury Bill Primary Participants

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42
Q

Do Treasury Bills pay interest

A

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)

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43
Q

What are certificate of deposit?

A

Receipts from banks for deposits placed within them

44
Q

What are the certificate of deposit interest related to

A

Sterling overnight index average (SONIA)

45
Q

What is the maturity date of Certificate of deposits usually

A

1-3 months

46
Q

Commercial Bills what are they

A

Short-term negotiable debt instruments issued by companies to fund day to day cash flow

47
Q

What are the maturity dates for commerical bills

Why are they more volatile

A

30 - 90 days
Normally unsecured - compared to Treasury bills

48
Q

What are the two types of money market funds

A

Short-term money market fund
Standard money market fund

49
Q

What is short-term money market fund?

A

Invested in short term debt and money market instruments
Have weighted average maturity of <60 days
Weighted average life of <120 days

50
Q

arket fun

What is standard money market funds

A

Higher returns
Invest in assets extended maturity between 6 - 12 months

51
Q

What is the base rate of return on money market instruments

A

4.25%

52
Q

What are the charges of money market fund

A

No initial charges - low annual charges of 0.15%

53
Q

Fixed interest securities

Who are they issued by? Why are they issued

A

Issued by gov, corporations - to raise money to finance longer term borrowing requirementes

54
Q

What are fixed interest securities described as

A

Negotiable fixed interest, long-term debt instruments

55
Q

What is the long term part of fixed interest securities

A

Typically run between 2-30 years

56
Q

What are bonds characterisitcs

A

Coupon - fixed interest
Par value - fixed redemtpion value
Redemption date - repaid after fixed period

57
Q

What are the three features of a bond

A
  1. Issuer name
  2. Coupon
  3. Maturity date
58
Q

What are bond prices quoted at

A

£100 nominal value

59
Q

What affects the market price of £100 nominal value of bond

A

Price of which bond will be redeemed by issuer at redemption date
Amount of interest that will be received

60
Q

Why does trading and prices in financial times of bonds not accurate

A

Does not reflect accured interest “clean prices”
Mid-market prices (midpoint between buying and selling prices quoted in market)

61
Q

How often is interest paid on bonds

A

Twice a year

62
Q

What is cum dividend bond

What does the buyer must do? They must pay

A

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)

63
Q

What is an ex dividend bond?

A

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

64
Q

What is the negative if buyer purchases a bond after it goes ex dividend

A

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

65
Q

What is the dirty price in relation to bond

A

Amount paid by a purchaser - clean price +- interest adjustment

66
Q

What are the two markets in bond

A

Primary
Secondary

67
Q

What are the 4 markets for bonds (trading)

A

Government sector
Corporate sector
Sterling loans to foreign borrowers
The euroband market

68
Q

What are some types of bond indices

A

FTSE Actuaries UK gilt index series (UK)
Bloomberg US aggregate bond index (US)

69
Q

What are the two yields published in financial press

A

Interest yield
Redemption yield

70
Q

What is interest yield formulae

A

(Coupon/clean price)*100

71
Q

What is coupon paid on?

A

The nominal value of bond (£100). For example 8% coupon = returns of £8 py

72
Q

What is redemption yield

A

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

73
Q

Formulae for simplified redemption yield

A

interest yield +-( (gain or losses to maturity + number of years to maturity)/ clean price)) * 100

74
Q

If redemption yield is greater than interest yield what happens

A

Bond will be priced below par , return will incorporate the gain if held until redemption

75
Q

If redemption yield is less than interest yield what happens

A

Capital loss if bond is held until redemption date

76
Q

Are corporate bonds and gilts taxable?

A

Yes through capital gains but income tax is liable

77
Q

What are yields quoted against for index-linked bonds

A

RPI

78
Q

With OEICs what is the difference to direct holdings in relation to income and maturity date

A

Income is rarely fixed
No maturity date

79
Q

What happens to attractriveness level of bonds if IR increase

A

Bonds become less attractive (capital value of bond falls) and vice versa

80
Q

What are the credit ratings offered by Standard and Poor range from

A

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)

81
Q

What are the credit ratings for moody’s

A

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

82
Q

What is investment grade bonds credit rating

A

BBB- or higher (standard and poor)
Baa3 - moody’s

83
Q

What happens if an increasing balance of payments to bond prices

A

BP increase increase IR decrease bond

84
Q

What are the most volatile bonds

A

Long period to maturity date and low coupons

85
Q

Normal yield curve

A

Rising positive curve -> longer period of time held, higher yield

86
Q

Flat yield curve

A

When economic factors are stable - yield curve flat

87
Q

Inverted or reverse yield curve

A

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

88
Q

Gilt periods

DMO definition

A

DMO definition
Short <7yrs
Medium between 7-15 yrs
Longs >15 years

89
Q

Gilt period

Financial press definition

A

Short <5 years
Medium 5-15 yrs
Long >15 years

90
Q

Index linked gilt before september 2005

When does RPI be used

A

RPI eight month before each payment date

91
Q

Index linked gilt after september 2005

When does RPI be used

A

Three months before each payment date

92
Q

What is redemption yield roughly for index -linked gilt roughly linked to inflation rate

A

3% inflation rate

93
Q

What happens if owner does not repurchase stock on repo market

A

Repurchase transaction is cancelled. Stock becomes property of lender and can sell to release cash

94
Q

What is the buyback period for repo market

A

Two weeks - can range from overnight to several months

95
Q

What does BOE use the repo market for

A

To influence interest rates

96
Q

What is strips market

A

Separate trading of registered interest and principal securities

97
Q

What is stripping the process of

A

Process of separating conventional interest-bearing gilt into its individual interest and redemption payments which then can be separately held and traded

98
Q

What are strips referred to

A

Zero coupon instruments

99
Q

When are the two series of strippable gilts

A

First pays coupons 7 June and 7 December
Second pays coupons 7 March and 7 September

100
Q

What is a debenture

A

Secured loan agreement between lender and borrower with business assets used as security

101
Q

What will the agreement of a debenture include

A

IR, payment dates and redemption date
Assets backing debenture
Any conditions imposed on borrower

102
Q

What can debentures be secured by

A

Fixed charge
Floating charge

103
Q

What are Convertible bonds

A

Unsecured loan stock offering holder option of converting the bond into ordinary shares of issuing company

104
Q

What happens if conversion of convertible bond does not take place by expiry date

A

Bond will recert back to conventional dated bond, company retains right to redeem any stock outstanding once a certain percentage has been converted

105
Q

What is CGT relation to convertible bonds

A

Convertible bonds are subject to CGT

106
Q

What are floating rate notes

A

Bonds issued by companies which pay interest rates linked to money market rate such as SONIA

107
Q

What happens to the coupon on floating rate notes

A

reset every quarter to a specified level over reference rate

R02 - 2023 (11 decks)

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