cash investment and deposit Flashcards
default risk - cash
- obligation to repay deposit
- 2008 showed a real risk
-credit ratings assess risk - FSCS protects deposits in UK
FSCS
- protect up to £85,000.00
- investors with several accounts can not recover more than someone with one
- partners get £85,000.00 each in deposit
- if deposit groups are held at banks and building societies that are subsidiaries of a larger group and only parent company is asuthorused they can’t claim more
- UK branches of EEA authorised deposit taking firms are eligible
- Deposits held with an EEA branch of UK firm are not - it’s the european equivalent.
- channel islands and isle of man can’t
- aim to pay out within 7 days
- offshore accounts aren’t
interest rate risk
- cash deposits carry risk that the return earned will vary depending upon movements in rates
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Reinvestment Risk
- for fixed term deposit
- the risk the original investment may be made when interest rates were high. At point of reinvestment the returns are a lot less
offshore sterling / foreign currency deposits
- Available to invest in sterling but in tax heaven
- could have a lower protection rate than the UK
Foreign currency deposits
- Interest rate paid reflects prevailing market rate for the currency in which the account is
- should maintain capital value in foreign currency
dangers ;
- hugh interst rates could mean high inflation.
- investor might accept low interest rate in strong currency but they may not strengthen consistently against sterling
- some countries don’t have the same supervisionary structure.
Facts to consider offshore currency
- protection
- ability to pay
- interest being paid at a variable rate
- if details of currency are not available the prospect of sterling in the relevant period. If sterling goes up against others generally then they should expect to loose on conversion of the capital sun
- volatility of currencies past value against major currencies.
- what the markets and other investors consider to be movement i against sterling over the lifetime if the investment and the range of opinions
when Useful;
- want currency in currency where they have liabilities.
- investors who want to speculate on exchange rates while earning some income in the meantime.
restricted account
Notice accounts
- offer higher then usual ones
- have to give so many days notice
- risk is that money may be needed
- risk is that the interst rates can change
- can be variable meaning if the interest rate goes down the money will.
- will loose interst rate for withdrawal before this
deposit accounts
- can be 1-5 years
- higher interest rates are available
- can be days to years
- often have minimum amount
- smaller banks offer higher rates with more restricted choice
- done term deposits are called bonds . rates can be tiered according to size of the deposit and the temp of the investment
- suited who want certainty of income
structured deposits
-return over fixed term a percentage (110% of charge in ft
or all back
- they are not rush free as the interest is not guaranteed
NS&i
- do not offer index linked savings accounts
- they do offer the isa and a junior
- income bonds must be 16 easy access
- investment account minimum is 20 max is 1 million
- saving account - higher inteeeesgbmudt be 16 must do online or telephone
- guanrnatees income bond - 16 fixed three years minimum is £500
- giantess growth bond - must be 16 fixed return for 3 years minimum is £500
- green savings bond - renewable projects
money market
- allow issuers to raise funds fir short term periods at low rates.
-HMtreasury bills are sold for day to day spending.They are sold for less than the value and when they are repaid they get full amount instead of interest
certificate of deposit
- receipts from banks
deposits have a fixed rate of interst relating to sterling overnight index average
fixed maturity so can’t be withdrew
yields on cds are less than normal deposit because of added benefit if being able to trade the cd and acess it
most are issued for3 month
commercial bills
short term by companies to fund day to day cash flow
issuesd at a discount to maturity value of 30 to triple time days
they are unsecured and issued by companies with high credit rating
the yield is higher than treasury bill to reflect risk
types of money market
short term invest in money market has a weighted maturity of no more than sixty days and a are up to one hundred and twenty
long term invest in money market and have higher returns and therefore invest in assets with extended maturity of 1/2 year
risk and return in money
- need to consider liquidity
cost
cash based
experience of team
commercial bills and certificates of deposit will offer higher returns because of risk
cash based funds lower
have sane risk as cash currency credit and inflation
placing in a bank means risk of default money market diversified it but has other risk
Bond - info
name - confirms who owns and where interst is paid
nominal value - £100 not market price. the nominal amount is used to determine the interest and maturity. When bond nears the end of its life its market price will approach nominal amount.
- coupon - the rate of interest payable on the bond. It is set at the time of issue and depends on market forces at the time. It is expressed as gross. Bonds tend to pay two times a year.
-maturity date - this identifies the specific date on which the issuer will repay the nominal value of the bond to the investor who owns it at the time.
Pricing - you hey are traded by nominal value. Bond prices are quoted at a precise for £100 nominal value although any amount can be purchased. the nominal value is the amount that will be paid by the issuer at redemption date and the interest.
Trading - bonds half way through advertised half way through between the buying and selling point. they would pay higher price for it and a lower amount for selling
- they are clean half way through and ignore the accrued interest. The interest is daily and must be added to or subtracted to the price to get the purchase price
Cum and ex dividend interest
- when bonds come with interest (cum) the purchaser will receive the full six months of interest even though the bond was owned by them for less than the interest period. ( buyer has to then compensate the seller )
exdividend - If bond is bought other way it is is bought ex dividend and the interest is paid to the seller. If it’s without interest the price will reflect this.
dirty price is the total amount paid ( clean price plus or take any interest adjusted )
secondary
- uk gov , companies and loans to foreign buyers
- eurobonds are international bonds that simulate in a crunch different to that of the country issued
- euro dollar
primary market
- the uk issues gilts through HM Treasury’s DMO
- large investors bid for price and quantity
- successful bidders pay the price
- non competitive investors are bidders for less than £500,000
- other companies appoint an investment bank to manage the issue which may use a syndicate care banks to market the bonds to potential investors if the issue is a large one
- the issue and prospective coupon are marketed to potential investments
interest yield
- expresses the income from a bond as a percentage of the price an investor would have paid for the bond
- use the clean price
coupon
————— x 100
clean price
- not guaranteed to profit. Losses are made but can be sold before redemption
- will depend on economic climate as well
- interest yields could be described as misleading
redemption yield
redemption yield takes into account income payments from bonds and capitals losses / gains
it adjusts for payments
capital gains in last year but payments are half yearly.
redemption yield assumes that the investor reinvests each interest payment when recieved by buying more stock of the same redemption yield
simplified redemption yield is interest yield +- gains or loss to maturity / number of yields to maturity / clean price x 100
redemption yields does not reflect how different ones are taxed so it’s the completly accurate
interest rates and bond
- cuts to interest rates lead to increased interest in bonds due to higher interest rates available
bond risk
- default
- currency - most bond portfolios include a global bond for diversification.
- inflation - index linked bonds provide protection because the unrest and capital
- liquidity - trade infrequently and present liquidity risk
- interest rate - when interest rates rose capital value falls. Long term will fluctuate more than short
categories of gilts
- DMO shorts - less than 7 years mediums between seven and fifteen and king over fifteen
repo
- agree to sell and buy back at a price in future .
- longer the term the higher repurchase cost to reflect greater interest cost.
short term loan with gilts security thr interest rage is competitive. Seller continued to gain exposure to gilt markets and raises finance in a temporary basis without costs of buying and selling
fixed floating
- for debentures
- fixed - charge over a assets
floating - this is one which is not secured on an asset the fixed gets paid first
convertible bonds
- they are unsecured loans that offer the holder thr option of converting the bond into ordinary shares of the issuing company under specific terms and conditions
- interest is payable in the usual way until the option is exercised although they usually carry a lower coupon .
The low interst rate is compensated by the opportunity if a favourable conversion
if the conversion does not take place by the expiry date the bond will revert to a conventional dated bond although the company usually retains a right to redeem any stock outstanding once a certain percentage ahead been converted.
floating rate b
- these are bonds issued by companies and governments which pay a rate of interest that isn’t fixed but linked to a money market rate.
- sonia stealing overnight index average is popular one
- the coupon is reset every quarter to a specified level over the reference rate
- If interst rates rise the Faran coupon also rises
- likely stays close to nominal val but will alter if creditworthiness of issuing companies change
PIBS and PSBS were ones issued by building societies. originally were the former but converted over during Mutualisation . They can no longer be issued as they don’t meet regulatory rules but exhausting can still be sold
