Chapter 1 Flashcards
What are the 5 risks associated with cash?
1) Default Risk - the creditworthiness of the firm you save with.
2) Inflation Risk - the impact of inflation
3) Interest-rate Risk - the uncertainty of the interest rate movements
4) Currency Risk - exchange rate movements
5) Reinvestment Risk - the likelihood of similar deals being available at the end of a fixed term investment
What are the main differences between instant and restricted access accounts?
1) Instant access can be accessed instantly. Restricted access require notice or they must be invested for a specific term.
2) Restricted access often offer higher interest rates.
What are the rules of a cash ISA if capital is provided by the parent?
If the interest received is more than £100 per annum, the interest belongs to the parent and should be declared on their self assessment form.
Which NS&I products are tax-free?
- Premium Bonds
- Direct ISA
- Junior ISA
- Fixed Interest Savings Certificates
- Index Linked Savings Certificates
- Children’s Bonds
Which NS&I products are taxable?
- Direct Saver
- Income Bond
- Investment Account
- Guaranteed Income Bonds
- Guaranteed Growth Bonds
- Green Savings Bonds
What are the minimum and maximum contribution amounts of premium bonds?
£25 and £50,000
What are the minimum and maximum contribution amounts of a direct ISA?
£1 and £20,000 per annum
What are the minimum and maximum contribution amounts of a junior ISA?
£1 and £9,000 per annum
What are the minimum and maximum contribution amounts of fixed interest savings certificates and index linked savings certificates?
£100 and £15,000 (per issue) but you can reinvest the full value of exiting certificate at maturity.
What are the minimum and maximum contribution amounts of a children’s bond?
£25 or £3,000 per issue.
What are the minimum and maximum contribution amounts of a direct saver?
£1 and £2,000,000 (sole) or £4,000,000 (joint)
What are the minimum and maximum contribution amounts of income bonds, guaranteed income bonds and guaranteed growth bonds?
£500 and £1,000,000 (sole) or £2,000,000 (joint)
What are the minimum and maximum contribution amounts of an investment account?
£20 and £1,000,000 (sole) or £2,000,000 (joint)
What are the minimum and maximum contribution amounts of green savings bonds?
£100 and £100,000 per person
What are the 3 types of arrangement used within money market investments?
1) Treasury Bills
2) Certificates of Deposits
3) Commercial Bills
What is a treasury bill and who is it issued by?
- Issued by the government.
- Managed by the debt management office.
- Bought below face value and repaid at face value.
- Risk free investments.
- Over short terms (typically 12 months)
What is a certificate of deposit and who is it issued by?
- Issued by banks.
- Fixed term and fixed return (usually 1-3 months with interest paid on maturity)
- Cannot withdraw early.
- Can be sold on the stock market.
- Returns are generally higher than treasury bills.
What is a commercial bill and who is it issued by?
- Issued by companies
- Very short term (typically 30-90 days)
- Bought below face value and sold at face value
- Not as easy to sell
- Pay highest return to mirror highest risk.
What is a GILT?
A loan to the government. They are negotiable fixed interest long term debt instruments.
What is the nominal value of a bond?
£100
What is the clean price?
The price that would be paid if no adjustments were made for any interest to be paid from the bond.
What 3 sectors is the bond market split into?
1) Primary Market GILTS
2) Primary Market Corporate Bonds
3) Secondary Market
How do you calculate interest yield?
(Coupon x 100) / Clean Price
How do you calculate gross redemption yield?
Interest Yield + or - (gain or loss to maturity / number of years to maturity) / clean price ….. answer x 100
What are the 2 types of risk that impact supply and demand for bonds?
1) Unsystematic risk - affect particular stock
2) Systematic risk - affect whole of market
What are the 3 main types of bond yield curves?
1) Normal Yield
2) Flat Yield
3) Inverted Yield
What would a normal yield curve show?
That investors demand higher yields for purchasing longer term bonds. This is because they would expect a higher return in exchange for the risk they are taking.
What would a flat yield curve show?
When the economy is stable and no changes to interest rates or inflation are expected then there is less risk to be taken.
What would an inverted yield curve show?
Occasionally the curve can invert so that the yield expected on longer term bonds is lower than on short term bonds. An expectation of rising interest rates in the short term followed by a reduction in rates thereafter can drive this.
What are the time lengths for different gilts?
Short - less than 7 years
Medium - 7 - 15 years
Long - over 15 years
What is the indexation lag?
When calculating the rate of inflation used, GILTS issued prior to September 2005 use RPI figures from the period 8 months prior to each coupon payment date while those issued after this date use RPI figures from the period three months prior to each coupon payment date.
What are the two charges for debentures and what do they do?
1) Fixed Charge - a charge over specific assets of the company which means that the sale of the asset is restricted.
2) Floating Charge - a general charge over any of the company assets which means that the company can still deal with or sell their assets.
A debenture with a floating charge has a lower priority than a fixed charge.
What are the 4 types of corporate bond?
1) Convertible Loan Stock
2) Floating Rate Notes
3) Permanent Interest-Bearing Shares
4) Perpetual Subordinated Bonds
What is convertible loan stock?
Unsecured loan stock. It gives the holder the opportunity to convert their loan into a fixed number of shares. Interest is paid on the loan. Any gains on disposal are liable to CGT.
What are floating rate notes?
These are issued by banks. They pay an interest return linked to money markets. Rates vary from payment to payment. Price often stays close to nominal value.
What are permanent interest bearing shares?
These are issues by building societies and traded on the stock market. They are undated stocks. They are not covered under the FSCS. No obligation to make up missed payments. Interest is paid gross. They rank behind all depositors and other creditors in liquidation. No CGT payable on growth.
What are perpetual subordinated bonds?
Any building society that demutualises converts their permanent interest bearing shares to perpetual subordinated bonds. They cannot be issued by banks.
What are the charges for stamp duty (paper) and stamp duty reserve tax (paperless)?
- stamp duty (paper) - 0.5% of purchase price rounded to the next £5.
- stamp duty reserve tax - 0.5% of purchase price rounded to the nearest penny.
What is the charge on panel of takeovers and mergers levy?
£1 flat fee applied to all trades of more than £10,000.
What are ordinary shares?
Gives the shareholder a right to a share in the profits of the company and a right to vote at company meetings as well as ownership of a share of the company.
Tax is owed over the dividend allowance.
What are the dividend tax bands?
Basic rate = 8.75%
Higher rate = 33.75%
Additional rate = 39.35%
What are preference shares?
They rank above ordinary shares in the even of liquidation. They tend to pay a fixed rate of return every six months. Dividend will only be paid if a profit is made. No voting rights.
What are the 5 types of preference share?
1) cumulative - missed dividends Must be made up in future years.
2) non-cumulative - missed dividends do not have to be made up and the investor losses their right to the dividend at the end of the financial year.
3) participating - pay a fixed rate of dividend and a share of the company profits
4) redeemable - represent a temporary source of finance.
5) convertible - can be converted into ordinary shares
What are the 6 risks associated with equity investment?
1) equity capital risk - lower dividends can reduce demand which reduces share price
2) market risk - beyond the control of the company. Economic issues can affect share prices.
3) share dividend volatility - dividends fluctuate and companies can hold back profits and reduce dividends
4) liquidity risk - smaller company shares can be difficult to sell or trade
5) currency risk - shares held overseas have the risk of currency movements adjusting losses or gains.
6) counterparty risk - the organisation which the risk is held with will fail.
What is the formula for Earnings Per Share?
Profit after tax and preference dividends / number of ordinary shares in issue
What is the formula for dividend yield?
(Dividend per share / current
Share price) x 100
What is the formula for dividend cover?
Earnings per share / divided per share
OR
Profit attributed to ordinary shareholders / dividends paid
What is the formula for price earnings ratio?
Current share price / Earnings per share
What is the formula for net asset value?
Net assets attributable to ordinary shareholders / number of ordinary shares in issue
What are the 4 main FTSE indices?
1) FTSE All Share Index
2) FTSE 100 Index
3) FTSE 250 Index
4) FTSE 350 Index
What are the 3 smaller FTSE indices?
1) FTSE SmallCap
2) FTSE Fledgling
3) FTSE AIM Index Series
What are the 10 main overseas indices?
1) Dow Jones - USA
2) Standard & Poor’s Composite - USA
3) NASDAQ - USA
4) Nikkei 225 - Japan
5) Topix - Japan
6) DAX 30 - Germany
7) Hang Seng Index - Hong Kong
8) CAC 40 - France
9) FTSE/JSE - South Africa
10) S&P All Ordinaries - Australia
What are the 3 risks associated with property?
1) Liquidity Risk
2) Management Risk
3) Void Risk
How do you calculate gross rental yield?
1) Rent per month x 12 months
2) (Total rent / purchase price) x 100
How do you calculate net rental yield?
1) rent per month x 12 months
2) (total rent - management charges) / (purchase price + purchase costs) x 100
What SDLT is due on a rental lease?
1% paid on the rental excess for residential leases and 1% on the rental excess up to £5m and then 2% thereafter for commercial leases.
What is the SDLT threshold on leases?
Net Present Value needs to exceed £125k for the residential property or £150k for commercial property.
What is the excess SDLT payable on a second home or BTL residential property purchased for £40k or more?
3% extra.
What is the SDLT due on non residential properties?
£0-£150,000 = 0%
£150,001-£250,000 = 2%
£250,001 and over = 5%
What are the SDLT rates for first time buyers?
Up to £425,000 = 0%
£425,001 - £625,000 = 5%
Standard rates apply over £625,000.
What are the 6 Rent a Room criteria?
1) Must be owners main residence
2) One exempt amount per residence
3) Must not be self contained
4) Must be furnished
5) Owner must also be a residence
6) Must be in the UK
