Accounting - Different Types of Investment Options

Question 1

What are the two types of return an owner can get through investment?

Answer 1

Capital gain and an Income stream

Question 2

What is meant by the term “Capital Gain”?

Answer 2

A capital gain is where the value of the asset increases over time so that it can be sold for more than the purchase price.

Question 3

What is meant by the term “Income stream”?

Answer 3

An income stream where the asset generates some sort of income (such as interest, rent or dividends)

Question 4

What are the three main types of assets which are used for investment?

Answer 4

• Money
• Property
• Shares

Question 5

What is meant by the term “bank account”?

Answer 5

Most basic and common for of investment, you put money into a bank or a similar institution.

Question 6

Advantages for a bank account

Answer 6

• Money is readily accessible
• Virtually no risk of the business losing investment

Question 7

Disadvantages of a bank account

Answer 7

• There is a very low return (sometime can go into the negative)

Question 8

What is a term deposit?

Answer 8

Higher rate of interest in return for agreeing to invest for a set term (this can vary from 6 months to five years).

Question 9

Advantages of a term deposit

Answer 9

• Higher interest rates
• Very secure, which means there is little risk
• Simplicity

Question 10

Disadvantages of a term deposit

Answer 10

• No access to funds before set term date
• You lose the funds if taken out early + and additional fee for early withdrawal

Question 11

What is a bond?

Answer 11

Issued by the government when they wish to raise funds by borrowing from the public, usually over a long period of time

Question 12

Advantages of a bond

Answer 12

• Government owned (means its secure)
• Competitive interest rate (since governments are competing with banks)

Question 13

Disadvantages of a bond

Answer 13

• If market interest goes above interest on bond, value of bond decreases

Question 14

What is meant by “property”?

Answer 14

Buying real estate of some type, this can provide capital gain and an income stream

Question 15

Advantages of buying property

Answer 15

• Can provide both a capital stream and an income stream
• Can be less volatile in comparison to something like stocks
• Can rent out for an income stream

Question 16

Disadvantages of buying property

Answer 16

• Property market is subject to fluctuations
• if interest rates rise, people won’t be buying houses.

Question 17

What is meant by “managed property funds”?

Answer 17

Managed fund that pools the resources of a number of investors into one fund that is invested in a range of properties, known as a managed property fund

Question 18

Advantages of a managed property fund

Answer 18

• Investor who cannot afford to purchase property on their own have access to this form of investment
• Allow investors to diversify into a number of property assets.

Question 19

Disadvantages of managed property fund

Answer 19

• Time consuming to get right
• A long-term investment to make profit

Question 20

What is meant by “shares”

Answer 20

You are buying part ownership of a business giving the shareholder, some say in the running of the company

Question 21

Advantages of buying shares

Answer 21

• Shares outperform other forms of investment
• Have to pay less tax on the profits because they have already been taxed
• A large variety of choices of shares

Question 22

Disadvantages of buying shares

Answer 22

• Dividends (a share of the company’s profits) depends on the profit of the company, if company does bad no profit
• There are fluctuations in the daily shares market

Question 23

What are debentures?

Answer 23

Used by companies to raise funds. Means the company doesn’t have to go to a bank.

Question 24

Advantages of a debenture

Answer 24

• Higher rate of return to entice new investors
• Fixed interest rate

Question 25

Disadvantages of a debenture

Answer 25

• Could place financial strain on a company
• ## Cap to how many debentures there can be for each company