Chapter 1 Flashcards
Name the 4 main types of asset classes
Cash
Fixed interest securities
Equities
Property
What are the personal savings allowance (PSA) for:
- Basic rate taxpayer
- Higher rate taxpayer
- Additional rate taxpayer
Basic - £1,000
Higher - £500
Additional - £0
What is a money market investment?
A ‘money market investment’ is essentially a short-term loan to the Government, a bank or some other organisation. These investments often pay very low rates of interest because of their short-term nature.
Who issues Treasury Bills and describe some features?
Issued by the government
* Probably the most common arrangement.
* Mangaged by the Debt Management Office (DMO).
* Weekly auctions are held to issue the bills.
* They are bought below face value and repaid at face value to provide the growth.
* Risk-free investments.
* Over short terms (max 12 months).
Who issues Certificates of Deposit (CDs) and describe features:
Issued by banks
* Fixed-term and fixed-return.
* Cannot withdraw early.
* But can sell them on via the Stock Market.
* Interest returns are fixed, and usually relate to London Inter-Bank Offered Rate (LIBOR).
* Returns are generally higher than Treasury Bills.
* No guarantees apply.
Who issues Commercial Bills and describe features?
- Typically very short term. 30 - 90 days is common.
- Operate similarly to Treasury Bills.
- They are bought below face value and sold at face value.
- They are not as easy to sell as Treasury Bonds.
- Often pay the highest return to mirror the highest risk.
Jack and his wife Cassandra have three children, Jonah aged 18 months, Sian aged 4 and Chloe aged 17.
What is the maximum they can put into standard Cash ISAs?
A. £20,000.
B. £40,000.
C. £60,000.
D. £72,360.
C
Both adults can now contribute £20,000 into the Cash ISA. As Chloe is 17, she can also contribute to one.
The other two children would only qualify for the Junior ISA.
Peter is investing in various fixed interest securities. He has just purchased a Treasury 6% 2034 Gilt. The
clean price that was published was £105 but Peter paid £110 dirty price to enable him to receive the next
coupon distribution. The par value is £100. What running yield will Peter receive on his investment?
C
The dirty price paid is not used in a running yield calculation, as it is simply an extra payment to secure all of the next coupon distribution.
The running yield is the coupon t the clean price, so £6 -r £105 = 5.71% running yield
An investor pays a clean price of £114.60 for £100 nominal value of stock, with a 6% coupon. Assuming the stock has exactly seven years to run until maturity, what will the simplified gross redemption yield be?
Calculate the running yield first by dividing the coupon by the clean price.
6 / 114.60x100 = 5.24%
Then calculate the loss or gain that would be made at redemption: £114.60 - £100 = £14.60.
This would be a loss, as they are paying over par to buy it. Divide this loss by the number of years
remaining. £14.60 / 7 years = £2.09% annual loss.
Divide this annual loss by the clean price: £2.09 / 114.60 x 100 = -1.82%
Deduct this figure from the running yield: 5.24% -1.82% = 3.42%
Peter, a higher rate taxpayer, has £90,000 of savings in his only building society account.
Karen, an additional rate taxpayer, has £101,000 in her only bank deposit account. Both accounts provide the same interest rate. In comparing the two accounts you would note… (TICK ALL THAT APPLY)
A. Karen would have a higher level of protection from the FSCS.
B. Peter’s account must have exit penalties, as building societies always pay higher returns.
C. both accounts would have the same level of tax deducted automatically at source.
D. Karen’s account is less likely to provide voting rights.
E. the maximum Peter can deposit in a building society account is £100,000.
C&D
*Both would be protected by the FSCS up to the £85,000 limit.
*Building societies can have voting rights through their share accounts, but these do not guarantee better rates.
*All interest from bank and building society accounts is paid gross irrespective of the tax status of the depositor.
When depositing cash into a bank account, an investor should be aware that…
A. the only return will be interest, the capital will not grow.
B. all accounts are obliged to pay an interest return.
C. interest payments to non-taxpayers are always made without tax being deducted.
D. protection from the FSCS may apply within certain limits.
E. a term account is more likely to pay a higher rate than an instant access account.
A,C,D,E
- Capital growth is not possible from bank accounts with the only growth coming via interest distributions.
- Interest is paid gross to all investors.
- FSCS protection applies to the first £85,000 of an investor’s deposit in any organisation that qualifies.
- A term account would usually pay a higher rate as investors have minimal or no access to the money during the term
Jessica and Troy have their savings of £50,000 each in a NS&I investment account and a building society account respectively. When comparing the two accounts…
A. Jessica is effectively lending her money to the Government.
B. both are protected under the FSCS rules.
C. Troy will usually receive lower rates of interest.
D. both accounts will pay interest net of basic rate income tax.
E. Jessica can put a maximum of £1,000,000 in her account and Troy has no maximum.
A , E
- NS&I is the Government’s banking arm and so investors are technically lending their money by saving with them.
- They are government, not FSCS protected.
- Both pay gross interest.
- The investment account has a £1m maximum deposit and pays its interest gross but taxable. There is not usually an upper limit on building society accounts unless it is something like a Cash ISA
Mark invests in several GILTS and corporate bonds. When comparing these…
A. GILTS are less volatile than corporate bonds
B. corporate bonds are sub investment grade, whereas GILTS are investment grade
C. if a higher yield is sought, a corporate bond is likely to be a better solution
D. corporate bonds are easier to trade than GILTS
E. GILTS are only available on the primary market
A&C
This question is all about the hierarchy of risk in bonds.
GILTS, with their government guarantee are the most secure, but offer the lowest returns. As a result, their value tends to be less volatile than corporate bonds.
Both GILTS and corporate bonds are often relatively liquid but smaller companies can be harder to trade.
Sub -investment is a term for lower-rated corporate bonds, so many of them are investment grade, as all GILTS are.
Harry is 15, and has just started a Saturday job for the summer holidays. He will earn £40 per day, but will
only be working for 7 weeks. His grandmother wants to encourage him to save, so has said that she will
give him £1,000 to add to whatever he saves from his wages. As Harry is a new saver, he is asking about
deposit accounts. You can correctly tell him…
A. normally, the longer the notice period, the higher the interest.
B. term accounts usually pay higher interest.
C. banks pay higher rates than building societies.
D. building societies have more choice of accounts.
E. he qualifies for an investment ISA.
A&B
The longer you keep your money under wraps, the better your rate should be.
Banks and building societies have little between their rates and products and you need to be 18 to qualify
for an investment ISA.
What is a fixed-interest security?
Fixed-interest securities or ‘bonds’, are issued by governments, companies and other official bodies as a way of raising money to finance their longer-term borrowing requirements.
What does Price at redemption (PAR) mean?
The fixed value that investors will receive at the end of the term
What are Bonds and GILTS?
Negotiable fixed-interest long-term debt instruments…
- tradable investments (negotiable)
- that pay a fixed return (fixed interest)
over a period of 20 to 30 years (long-term) - A loan to someone (debt instruments).
Explain the 4 parts of the below stock certificate:
1) The investment is a corporate bond, as it is a loan to
Sainsbury’s.
2) There is 6 % interest payment per year. This is referred to as
the stock’s coupon
3) The maturity date is 2029: also known as the redemption
date
4) The amount of money that will be repaid in 2029 is £100.
This is the PAR value or clean price
What is the formula to calculate the interest yield?
Coupon ÷ Clean Price x 100
Keira is buying some Tesco 4% with 16 years left to run. The current clean price is £127.86.
What is the interest yield?
The interest yield is:
4 x 100
/
12.86
= 3.13%
Connor is buying some Guinness 8% with six years left to run. The current clean price is £116.85
What is the interest yield?
The interest yield is:
8.0 x 100 ÷ 116.85
= 6.85%
What is the difference between redemption yield and interest yield?
The redemption yield takes into account the gain or loss that would be experienced by the holder of the bond at maturity.
