Asset Classes 1

Question 1

How can you get a higher level at interest from a bank account?

Answer 1

1. Deposit a larger amount
2. Fix it to a longer term

Question 2

What is the inverse cash rate?

Answer 2

What longer dated deposits earn less than shorter ones

Question 3

What is the formula for compound interest?

Answer 3

Final value = deposit x (1 + (IR/N)) ^N x number of years

e.g. 10,406.04 = 10,000 + ( 1 + (4/0.01)) ^4

Question 4

What is the AER (annual equivalent rate)?

Answer 4

The true rate of interest, including compounding over a 12 month period

Question 5

What is the Fisher Equation using in inflation?

Answer 5

Real rate of return = nominal interest rate - rate of inflation

Question 6

What is a Requirement Linked Account?

Answer 6

A Bank account with a higher rate of interest due to certain conditions (e.g. minumum cash balance)

Question 7

What’s the difference between deflation and disinflation?

Answer 7

Deflation is a general decrease in prices

Disinflation is when inflation is falling

Question 8

Which agency has the responsibility and tools to maintain financial stability?

Answer 8

Financial Policy Commiteet (FPC)

Question 9

What are the maximum FSCS payouts for bank accounts?

Answer 9

Maximum compensation of £85,000 for each account holder who is an eligible claimant (ie, up to £170,000 for joint accounts), per authorised firm

Temporary large balances of up to £1 million are also covered (eg, proceeds from a house sale) for up to six months.

Question 10

Is P2P and crytocurrency covered by the FCSC?

Answer 10

No

Question 11

What are the tax implications for NS&I products?

Answer 11

None of NS&I’s products are subject to capital gains tax (CGT), but some are subject to income tax.

Question 12

What are the fixed terms for Greean & British savings bonds?

Answer 12

3 years

Question 13

What is the difference between Constant NAV (CNAV) and Accumulating NAV (ANAV) money market funds?

Answer 13

CNAV funds are issued with an unchanging face value (such as £1, €1 or $1 per share) - INCOME IS PAID OUT or USED TO BUY NEW FUNDS EVERY MONTG=H

ANAV (roll-up) funds - income is accrued daily but not distributed; rather, it is reflected by an increase in the value of the fund units/shares.

Question 14

What are Low volatility net asset value (LVNAV) funds?

Answer 14

• Greater sensitivity to pricing; and extra safeguards and controls are built into the structure.
• Can be bought and sold at a constant price, provided that certain conditions are met – eg, the value of the assets does not deviate by more than 0.2% from its face value
• Authorised for a maximum of five years, at which point only the CNAV funds may exist.

Question 15

What are Variable NAV (VNAF ) MMFs?

Answer 15

Use MTM accounting to value some of their assets. The NAV of these funds will vary by a slight amount, due to the changing value of the assets and, in the case of an accumulating fund, by the amount of income received

Question 16

What is called what a MMF falls below $1?

Answer 16

Breaking the buck

Question 17

What is amortised cost accounting?

Answer 17

Assumes that the instrument has been bought after issuance and held to maturity, and any difference between the acquisition cost and its face value is realised on a straight-line basis between those two dates

Question 18

What’s the difference between T-Bills and Commercial Paper?

Answer 18

• T-bills are issued (and therefore backed) by governments, they are considered to be risk-free.
• T-bills have maturities ranging from a few days to one year
• Commercial paper is the same as a T-bill, except that it is issued by large corporations instead of governments. They are less liquid than T-bills, although the liquidity premium can be small as investors typically buy and hold commercial paper to maturity, so they are less concerned with liquidity.

Question 19

What is a Certificate of Deposit?

Answer 19

Bank receipts (or certificates) confirming that a bank has received a sum of money from an investor. The bank agrees to repay this sum plus interest to the investor on a specific future date.

CDs are relatively ILLIQUID

Question 20

What is the benchmark for MMFs?

Answer 20

Sterling Overnight Index Average (SONIA) – the weighted average rate of all unsecured sterling overnight cash transactions among and between UK financial institutions. Eligible transactions are executed between midnight and 18.00 UK time, settled that same day, and are at least £25 million.

Question 21

What are the US and EU equivalents of SONIA?

Answer 21

• Euro Short-Term Rate (€STR) – €STR, is the wholesale euro unsecured overnight borrowing costs of euro area banks. It is calculated on all transactions over €1 million
• Secured Overnight Financing Rate (SOFR) – this is a broad measure of the cost of borrowing cash overnight, using US Treasury debt as collateral. F

Question 22

What’s the difference between P2P Lending and Crowdfunding?

Answer 22

• P2P lending involves lending money to individuals without using a financial intermediary
• Crowdfunding, seeks to raise equity from investors, rather than from borrowing.

Question 23

What is the tax treatment of P2P Funds?

Answer 23

The interest received is paid without tax deducted at source and must, therefore, be declared in full to the tax authorities (eg, HMRC in the UK), who will calculate the liability

Question 24

What is a Eurobond?

Answer 24

Denominated in a currency other than the home currency of the country or market in which the bond is issued.

Question 25

What is a double dated bond?

Answer 25

Issued with two maturity dates. The issuer can give notice and choose to redeem the bond on any day between the first and final maturity dates

Question 26

What are the difference in conventions for bond duration between FT and DMO?

Answer 26

FT
Shorts <5Y
Mediums 5-15Y
Longs >15

DMO
Shorts <7Y
Mediums 7-15Y
Longs >15

Question 27

What are drop locks & caps for FRNs? and what is mini-max bond?

Answer 27

• Drop lock = interest rate becoming fixed if it falls to a specified level
• Cap = if interest rates rise, the coupon also rises, but not beyond the ceiling
• Mini-Max = A collared FRN with a floor and a ceiling

Question 27

How do Tax Authorities trest Zero Bonds?

Answer 27

Tax authorities will deem the investor to have received a notional amount of income each year and tax them on that