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CISI Inv Risk & Tax > Asset Classes 1 - MM > Flashcards

Asset Classes 1 - MM Flashcards

1
Q

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

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

What is the inverse cash rate?

A

What longer dated deposits earn less than shorter ones

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3
Q

What is the formula for discrete compound interest?

A
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4
Q

What is the AER (annual equivalent rate)?

A

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

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5
Q

What is the approx Fisher Equation for the real rate of return including inflation?

A

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

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6
Q

What is a Requirement Linked Account?

A

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

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7
Q

What’s the difference between deflation and disinflation?

A

Deflation is a general decrease in prices

Disinflation is when inflation is falling

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8
Q

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

A

Financial Policy Commiteet (FPC)

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9
Q

What are the maximum FSCS payouts for bank accounts?

& temp balances

A

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.

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10
Q

Is P2P and crytocurrency covered by the FCSC?

A

No

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11
Q

What are the tax implications for NS&I products?

A

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

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12
Q

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

A

3 years

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13
Q

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

A

CNAV - Constant NAV/Face Value (£1, €1 or $1 per share) - INCOME IS PAID OUT or USED TO BUY NEW FUNDS EVERY MONTH

ANAV (roll-up) funds - NAV/Value of Fund/Shares increase in. value via daily income accrual (not distributed)

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14
Q

What are Low volatility net asset value (LVNAV) funds? (3 points)

Guidelines, pricing and duration

A
  • 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.
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15
Q

What are Variable NAV (VNAF ) MMFs?

A

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

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16
Q

What is called what a MMF falls below $1?

A

Breaking the buck

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17
Q

What is amortised cost accounting and on what basis is it calculated?

A
  • Assumes that the instrument has been bought after issuance and held to maturity,
  • any difference between the acquisition cost and its face value is realised on a straight-line basis between those two dates
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18
Q

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

Issuer, maturities, liquidity

A
  • T-bills are issued/backed by governments i.e. risk-free.
  • T-bills maturities - 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.
  • CP less liquid than T-bills, although the liquidity premium can be small as investors typically buy and hold commercial paper to maturity
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19
Q

What is a Certificate of Deposit?

Structure & Liquidity

A
  • 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
20
Q

What is the benchmark for MMFs?

A
  • 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.
21
Q

What are the US and EU equivalents of SONIA?

A
  • 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
22
Q

What’s the difference between P2P Lending and Crowdfunding?

A
  • P2P lending involves lending money to individuals without using a financial intermediary
  • Crowdfunding, seeks to raise equity from investors, rather than from borrowing.
23
Q

What is the tax treatment on income from P2P Funds?

A

Interest - paid without tax deducted at source and must be declared in full to the tax authorities (eg, HMRC in the UK), who will calculate the liability

24
Q

What is a Eurobond?

A

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

25
Q

What is a double dated bond?

A

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

26
Q

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

A

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

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

27
Q

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

A
  • 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
27
Q

How do Tax Authorities treat Zero Bonds?

A

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

28
Q

What is the difference between subordinated and unsubordinated debt?

A
  • Unsubordinated bonds (senior debt) carry an unconditional promise that they will be repaid before the creditor’s other obligations
  • Subordinated bonds (junior debt) rank after unsubordinated bonds for repayment.
29
Q

What are common covenants?

A
  • limiting further debt and its priority for repayment,
  • restricting the payment of dividends
  • restricting the sale of assets
30
Q

What is the Central Government Net Cash Requirement (CGNCR)

A

The CGNCR represents the shortfall between:

  • the central government’s revenues (what money it takes in, in the form of taxes and duties), and
  • what it spends on running the country (eg, paying state benefits, and infrastructure projects, such as road building).
31
Q

What is the Public Sector Net Cash Requirement?

A

It is equal to the sum of:

  • the central government net cash requirement (CGNCR)
  • the local government net cash requirement (LGNCR), and
  • the public corporations net cash requirement (PCNCR).
32
Q

How often is interest paid on most gilts?

A

Every 6 months (except floaters which pay Quarterly

33
Q

What is the structure of inflation linked gilts?

A
  • interest payments (and, indeed, the capital repayment at maturity) vary in accordance with changes in inflation rates, as measured by the RPI.
  • there is no deflation ‘floor’ for ILGs
  • the government measures the RPI with a three-month indexation lag (8 months prior to Sep 2005)
  • the coupon quoted for an ILG is much lower than is the case with a conventional gilt
34
Q

What is the other name for local authority bonds?

A

Corporation Stocks

35
Q

What are the 2 types of local authority bonds?

LAFSs/LANLs & Difference in marketability

A
  • Local Authority Fixed Stocks – Non-marketable fixed-rate investments - held to maturity unless redeemed early
  • Local Authority Negotiable Loans (Yearlings) – Marketable and have a life of no longer than two years
36
Q

What are the different types of German govies?

A
  • Bunds - 10 to 30 years
  • Bobls - 3 to 5 years
  • Schatz - up to 2 years.
37
Q

What are the different types of French govies?

A
  • bearer Obligations Assimilables du Trésor (OATs), with maturities of two to 50 years and which are sold on a regular monthly auction basis and short-term T-bills, and
  • Bons du Trésor à Taux Fixe (BTFs) with maturities of up to 12 months.
38
Q

What is the maturity of most Japanese gov debt?

A

10 years

39
Q

What is the minimum denomination of UK T-bills?

A

£500K

40
Q

What is the tax position on corporate bonds?

Income & CGT

A
  • Interest is paid gross, at specific intervals which will be set out in the bond’s terms (eg, usually half years for UK corporate loans).
  • CGT is not chargeable, providing that it is a qualifying corporate bond (QCB). Broadly, a QCB is one which is interest-paying, rather than a convertible; and is denominated in sterling.
41
Q

What is a debenture?

A

corporate bonds which are backed by security, (eg, land or buildings)

42
Q

What are Permanent Interest Bearing Shares (PIBS)?

A

PIBS are issued by building societies with the following features?

  • Interest is paid gross at a fixed rate, half-yearly and is taxable.
  • Building societies are under no obligation to pay the interest in any one year, nor to roll it over to the next year
  • PIBS are irredeemable. They are only repaid by an issuing building society on liquidation, in which case the PIBS holders will be the last creditors to be repaid.
  • Investors do not pay CGT on disposal, as the shares are classified as QCBs.
  • PIBS are fairly illiquid
43
Q

Bond running yield calculation?

A

Gross Coupon / Market Price

44
Q

Which National Savings and Investments (NS&I) products are tax free?

PICK

A

Premium Bonds

ISA

Certificates

Kids (junior) ISA

45
Q

How is default risk mitigated in P2P Lending?

A
  • the maximum loan from a lender may be capped at a percentage of the overall amount required by the borrower,
  • in this way a number of smaller loans are brought together from different lenders so if the borrower stops paying it doesn’t just affect one lender.

CISI Inv Risk & Tax (17 decks)

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