Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

R02 April 2020 > 1 - The characteristics, inherent risks, behaviour and correlation of asset classes. Part 1 - Cash investments and fixed interest securities. > Flashcards

1 - The characteristics, inherent risks, behaviour and correlation of asset classes. Part 1 - Cash investments and fixed interest securities. Flashcards

1
Q

How are the values cash and fixed interest securities vulnerable?

A

The are eroded by inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Which type of investment is generally considered a loser in an economic downturn?

A

Equities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

In periods of declining interest rates, which types of investments are most attractive?

A

Fixed interest bonds and equities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the different types of risks to investment capital and income?

A 
Shortfall
Systematic and Non-systematic
Currency
Interest Rate
Liquidity
Counterparty
Regulatory
Income
Inflation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Why is it important for an investor to have an element of cash within their portfolio?

A

So its easily accessible in the event of an emergency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are the key characteristics of cash investments?

A

Receive regular interest payments
The capital is not exposed to investment risk
There is no potential for capital growth
Is is called a liquid asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What should an investor consider before entering into a fixed term cash deposit?

A

The penalty for withdrawal could outweigh the interest differential
A notice period/penalty would normally apply

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the wider risks for deposit based investments?

A

Default risk - credit worthiness of the institution
Inflation risk - real return after inflation is negative
Interest Rate risk - Returns may vary over time

Note - for currency deposits, exchange rate movements could affect the rate payable and also impact on the overall capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What elements does an investor need to consider regarding the FSCS for deposits?

A

The limits only apply to each investor
An investor with accounts across several providers cannot recover more than a person with all accounts in one place.
Joint account holders can each recover the maximum in respect of the same account
If accounts are held with subsiduaries, only the parent company is authorised and only for the first £85K

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Why was there a reinvestment risk for savers in 2009?

A

Many had invested some 3-5 years before when interest rates were higher and therefore could not secure the same rate on reinvestment. This was particularly exposing for retired savers or others who relied on income from savings.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the common dangers of offshore accounts?

A

High rates are usually offered by hihg inflation countries with unstable currencies
Even strong currencies fluctuate, they may not rise enough to compensate for a low interest rate
There may not be the same supervisory structure as the UK and therefore institutional collapse may be more probable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the features of structured deposits?

A

Based on the performance of an index - such as FTSE
Risk free way to invest in the rise of stock markets
Generally require a commitment of 5 years
100% capital protection

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are the key features of an ISA?

A 
Interest is paid tax free
£20K limit
Arranged on an individual basis
Withdrawals can be made at any time
Subject to provider rules, amounts can be replaced within  the same tax year
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What type of ISA transfers can be undertaken?

A

Some or all of savings from a previous tax year can be moved to a different ISA manager
Within the same tax year, all of the savings can be moved
ISA cash savers can move their money to another cash ISA or to stocks and shares/Innovative finance ISA
Stocks and shares ISA can be moved to a cash ISA
A help to buy ISA can be moved to a lifetime ISA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are classed as eligible investments for ISA?

A

Bank and building society accounts
Units and shares in a UK unit trust and OEIC’s, UCTIS
Stakeholder cash deposits
National savings direct ISA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What are the minimum and maximum investment amounts in a National Savings Income Bond and Growth Bond and what term can they be over?

A

£500 minimum
£10,000 maximum
One or three years (two and five year terms are only availabe to customers renewing a maturing bond)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What is the simplest way a client could access the money markets?

A

Through a collective investment scheme

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What makes use of the money markets attractive to banks, companies and governments?

A

The instruments are highly liquid and carry a relatively low risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What are the money market instruments?

A

Treasury bills
Commerical bills
Certificates of deposits
Others - repos, bills of exchange

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Who issues treasury bills and how is the rate of return evidenced?

A

Issued by the Government
The par/face value is less than the issue price, at maturity the Government pays the full par value, therefore the interest is the difference between the purchase price and the maturity value.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What would a certificate of deposit be used for and can they be cashed in early?

A

Used by Banks and building societies to raise funds.
They cannot be cashed in early but can be traded on the money markets but the yield would be slightly lower than the agreed rate at the outset (usually linked to LIBOR)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What are commercial bills and how do they operate?

A

Short term negotiable debt instruments
Issued at a discount to their maturity value
Unsecured, so only issued by companies with high credit ratings.
Yeilds higher than treasury bills due to the credit risk and reduced liquidity

23
Q

How do managers categorise funds on the money markets?

A

Short-term funds - weighted average of maturity of no more than 60 days, weighted average life of no more than 120 days

Standard funds - periods extended to six - twelve months

24
Q

What factors should be considered when deciding if money market funds are right for a client?

A

How the funds compare with other cash-based investments
What charges are made and how these impact returns
How long it will take to realise the assets if the client needs access
What assets are contained and the degree of risk exposure
How experienced the fund management team is

25
Q

What is the general description of a fixed interest security?

A

Issed by Governments, companies or other official bodies to raise money/finance
The owner will receive regular fixed interest payments and usually repayment of capital at the end of the agreed period
Cannot be cashed in early, but the investor can sell them on the stock market at any time

26
Q

Why are fixed interest securities also know as ‘negotiable fixed interest, long term debt instruments’?

A

They are
Negotiable - the lender can sell the entiltement to a thrid party, who can sell it on
Fixed interest - the borrower is committed to pay for the duration of the loan
Long term - run between 2 - 30 years
Debt instrument - financial instruments representing debt

27
Q

What other names refer to fixed interest securities?

A 
Bonds
Loan Stock
Debentures
Loan Notes
Gilts - issued by the government
Corporate Bonds - issued by companies
28
Q

Why would a company use a bond to raise capital, as opposed to a Bank loan?

A

May not be able to lend for the required period
Bond market offers a wider range of lenders
Often cheapest method of borrowing money

29
Q

What are the three general characteristics of Bonds?

A

Coupon - fixed rate of interest

Par Value - redemption value

Redemption date - repaid after a fixed period

30
Q

What are the three key features the title of a bond will give?

A

Issuers name
Coupon
Maturity date

Will also contain a nominal value of £100 (market value will differ) as the bond nears maturity it will approach the nominal value

31
Q

How are Bonds priced?

A

Traded by their nominal/par value for £100
Nominal or par value determind by - the price at the which the bond will be redeemed by the issuer at the redemption date, the amount of interest received.

32
Q

Why would the prices quoted within the FT and other newspapers, be different to the price an investor would pay?

A

They are mid-market prices

They are clean prices - ignoring interest accrued - which is calculated daily and added or subtracted to the clean price

33
Q

What does Cum dividend mean in relation to Bond interest?

A

The purchaser will receive all 6 months interest
The buyer has to compensate the seller for the interest they did not receive
The buyer will pay the clean price, plus the accrued interest

34
Q

What does the Ex dividend mean in relation to Bond interest?

A

Interest payments are made to the registered holder, seven days before due
If the bond is purchased after than time, before the due date, it is bought ex - the full interest will be paid to the seller
The clean price is adjusted to reflect this

35
Q

How are bonds issued in the Primary Market

A

Large investors put in bids at the price and quantity they want
Successful bidders pay the bidded price
The can submit non-competative bids up to £500K and the stock is issued at the average of the accepted price

36
Q

If a Bond was issued by an investment bank on behalf of organisations or companies - what is the issue process?

A

The issue is marketed to potential investors
Potential investors place bids
Final terms are agreed and issued, investors have 24 hours to make firm bids

37
Q

Why is the secondary market of bond trading brisk?

A 
Holders constantly adjust their holdings to reflect
What income they need
Credit ratings of issuers
Future interest rate trends
Changes to expected inflation
Conduct of government finances
International tensions - social and political
Attractiveness of other assets
38
Q

What are the four major bond markets?

A

Government
Corporate
Sterling loans to foreign borrowers
Eurobonds - named according to the country in which they are issued (in a different currency) - i.e. Eurosterling bond/eurodollar bond

39
Q

What are the risks associated with bonds?

A

Interest rate risk - lower means greater value, higher interest rates means a falling value, therefore longer term bonds fluctuate more rapidly

Liquidity risk - can be difficult to sell readily at an acceptable price

Inflation risk - effect of erosion, however index linked bonds provide better protection as adjusted for inflation

Currency risk - movements in exchange rates

Default risk - issuer may not be able to meet their obligation to pay

40
Q

What are the two categories of credit ratings for Bonds?

A

Investment grade - ratings of BBB- or higher (or Baa3) relatively low risk of default

Non investment grade - ratings of below BBB-(or Baa3) considered to have a significantly higher risk of default. (also known as junk bonds/high yield bonds)

41
Q

What are the two factors affecting the volatility of bonds?

A

The lower the coupon the more volatile the bond

The longer the period to redemption, the more volitile the bond

42
Q

What is the purpose of a yield curve?

A

Means of comparing yields on different bonds as well as giving an indication of the markets expectations in future

43
Q

Why would a yield curve be inverted?

A

Investor expectations that interest rates will rise in the short term, and lower in future
Factors impacting supply and demand that reduce the yield on longer dated bonds

44
Q

What are the three categories given to gilts by the DMO?

A

shorts - less than seven (five by the financial press)
Mediums - seven and 15 years (five and fifteen)
Longs - Over fifteen years (same in press)

45
Q

How are investors protected by using Index Linked Guilts?

A

Interest payments revised in line with RPI
Capital repayment on redemption reflects changes in RPI

Note - if RPI falls, then both of the above will fall

46
Q

If a guilt is stripped, can the interest element be traded seperately to the redemption payment?

A

Yes it can

47
Q

What are the two types of corporate bond and what other restrictions might be in place for those issuing the bond?

A

secured or unsecured

An upper limit of borrowing
the company might need to stay within certain financial ratios

48
Q

What is the definition of a Debenture?

A

A written acknowledgement of a debt

49
Q

What would a trust deed for a debenture include?

A

Terms of issue - interest rate, payment dates and redemption date
Assets backing the debenture
Powers of the trustee
Any conditions imposed on the borrower

50
Q

What are the two ways a debenture can be secured?

A

Fixed charge over a specified asset

Floating charge - a general charge over any of the assets of a company that are not otherwise secured elsewhere

51
Q

Which would you prefer as a lender - a fixed or a floating charge and why?

A

Fixed - as the assets cannot be sold without authorisation of the debenture holder. Assets can be sold with a floating debenture and has lower priority for payment if the company is wound up.

52
Q

What is a convertible bond and its characteristics?

A

Unsecured loan stock that can be converted into ordinary shares of the issuing company.

Interest is payable until the option is exercised, they carry a lower coupon due to the potential gain on conversion to shares
Conversions rights vary - specified dates, periods and number of conversions
Nuber of shares may differ between issues, or fixed or reducing
If not converted, the Bond will revert to a conventional bond on end, but a company retains the right to redeem any outstanding stock

53
Q

What is a floating rate note?

A

Securities issued by companies that are linked to a money market rate, such as LIBOR

R02 April 2020 (14 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions