Cash Flashcards
Main Characteristics of cash deposits
- Receive regular interest
- No exposure to investment risk
- Real value eroded by inflation
- Easily accessible
Characteristics of interest on cash deposits
- Fixed or Variable
- Paid Gross
- Depends on term/notice required
- May have penalties on early withdrawal
Risks of Cash Deposits
- Default risk
- Inflation risk
- Interest rate risk
Items to consider in relation to Default Risk
- Creditworthiness
- If covered by FSCS
What does FSCS cover?
- 100% of first £85,000 per authorised institution per individual
- Based on parent company
- Only in UK (UK branches of EEA banks also included)
- Aims to pay out in 20 days
What is Inflation Risk
Risk of investment losing value/purchasing power due to rising prices
What is Interest Rate Risk
Risk of interest rates changing on variable deposits
What is Reinvestment Risk
Risk of interest rates changing on flexible deposits so you cant achieve the same rate again at the end of the term
Risk of Offshore Sterling Deposit Accounts (1)
Not covered by FSCS
Risk of Foreign Currency Deposits
- Foreign currency risk
- Interest rate risk
- Default risk
Items to consider if investing in foreign currency
- Expected movement vs. sterling
- Volatility of currency
- Interest rate movements
- Ability of provider to repay
- Any compensation schemes
Role of cash in portfolios
- Reduce volatility
- Provide liquidity for opportunities
- Tactical move against downside risk
Characteristics of Notice Accounts
- Higher variable rate than instant access
- Notice period before money withdrawn (30-120 days)
- Penalties for early access (interest for the notice period)
Characteristics of Term Deposit Accounts
- Typically 1-5 years, but can be 7 days or many years
- Fixed rate of interest
Characteristics of Structured Deposits
- Pay interest based on underlying equity index
- fixed term
- Original deposit can be guaranteed
Features of Cash ISA
- Wrapper not investment
- up to £20,000 per annum
- Only individual basis
- Must be UK resident
- Flexi-ISA available
- Withdraw any time
Eligible investments in Cash ISA
- Bank or building society accounts
- units in UK authorised Unit trusts/OEICs that are Money Market schemes
- NS&I direct ISA
- Stakeholder cash deposit products
What products are available with NS&I? (9)
- Premium Bonds
- Income Bonds
- Green Savings Bonds
- Investment Accounts
- Direct Saver
- Direct ISA
- Junior ISA
- Guaranteed Growth Bonds
- Guaranteed Income bonds
Features of NS&I Direct ISA
- Easy Access
- Only Opened online or by phone
- Not Flexi-ISA
Features of NS&I Income Bonds
- Must be over 16
- Instant Access
- Interest paid gross but is taxable
Features of NS&I Investment Account
- Must be over 16 or opened on your behalf
- Interest taxable
- Instant access
- Minimum of £20 up to £1m per person (£2m Joint account)
- Low interest
Features of Guaranteed Growth Bonds
- Guaranteed returns for 3 years fixed
- Must be over 16
- Minimum Inv. £500
- Interest paid gross but taxable
Features of NS&I Direct Saver
- Higher interest than Investment account
- Interest Taxable
- Must be over 16
- Instant access
- Managed by phone or online
- Minimum £1 and max £2 million per person
Features of Guaranteed Income Bond
- Guaranteed monthly income for 3 years fixed
- Must be over 16
- Minimum Inv. £500
- Interest paid gross but taxable
Features of Green Savings Bond
- Contributes towards green projects
- Must be over 16
- Fixed interest for 2.95% for issue 7
- 3 year fixed term
- invest up to £100,000 per person
- interest added each anniversary
- paid gross but taxable
Characteristics of Money Market Investments
- Governments, banks and companies issue debt instruments to manage short-term cash needs.
- Investors are banks, companies, local authorities, money market funds and individuals.
- High liquidity, low risk
- Fixed period, fixed rate
- Tradeable on money market
Name the types of money market instrument
- Treasury Bills
- Commercial Bills
- Certificates of deposit
Characteristics of Treasury Bills (9)
- Issued by governments
- Issue managed by Debt Management Office (DMO)
- Issued at weekly auctions
- Maturities of 1, 3, 6 or 12 months
- Ad-hoc issues for 1-354 day maturities
- Have to be purchased through Treasury Bill Primary Participants w/ min purchase of £500,000
- Issued below par + at maturity pay par value
- Backed by govt.
- High Liquidity
Characteristics of Certificate Deposits
- Receipts from banks for money held with them
- Fixed rate of interest
- Fixed term to maturity (1-3 months)
- Issued below the ordinary deposit because of liquidity
Characteristics of Commercial Bills
- Issued by companies
- Less liquid than treasury bills
- Issued at discount to maturity value
- 30 - 90 days
- Unsecured - default risk
- Higher yields than treasury bills
Name the two types of Money Market Investment Vehicles
- Short-term Money Market Funds
- Standard money Market Funds
Characteristics of Short-Term Money Market Funds
- Weighted average maturity of <60 days
- Weighted average life of <120 Days
Characteristics of Standard Money Market Funds
- Aim for higher returns than short-term
- periods of up to 6-12 months
Considerations when choosing a money market fund
1.Returns - compared to other cash investments
2. Charges
3. How long to realise the asset
4. Type of assets included
5. Experience of fund mgmt.
6. Credit rating of companies assets held with
