Chapter 1 - Cash Investments And Fixed-interest Securities Flashcards
What are the main risks of holding cash on deposit
- Inflation risk
- interest rate risk
- default risk
What is the maximum compensation payable under the financial services compensation scheme to cash deposits
Up to 100% of the first £85,000 per approved organisation
I.E i have a cash deposit worth £100,000 at bank A and £50,000 at bank B I would be covered for £135,000
What are the two types of restricted access account
- Notice accounts
- Term deposit accounts
Once a bond has been issued any subsequent trading of that bond takes place in which market
The secondary market
What does the nominal or par value of a gilt determine
- The price at which the gilt will be redeemed at the redemption date
- The amount on which the interest that will be received is calculated using the gilts coupon
What does the interest/running yield measure and what is the formula 
The interest of running yield measures the income return an investor receives on the amount paid for a bond
the formula is =
(coupon/clean price) x 100
Which are more volatile: bonds with long periods to maturity and low coupons or those that are short dated with high coupons
The most volatile bonds are those with long periods to maturity and low coupons
What is a reverse yield curve and how does it differ from a normal yield curve
A reverse yield curve indicates that yields are lower for longer-dated bonds than for short-dated ones - that is, the yield curve falls from left to right. this is the opposite to a normal yield curve which rises from left to right to reflect the higher yield usually required for investors to hold longer-dated bonds. A reverse yield curve occurs temporarily (although in some circumstances for many months at a time) when the long-term interest rate or substantially below current short-term levels and short-term interest rates are expected to decline
Do corporate bonds generally offer higher or lower yields than gilts? explain why
Corporate bond often yields more than the equivalent guilt. there is a higher credit risk involved in lending to commercial concerns: they can become insolvent, unlike the government. the corporate bond market is also generally less liquid, leading to wider bid-offer spreads and an increased risk that a bond cannot be traded when desired, for which investors require a compensating higher return
Main features of cash investments
- Investors receive regular interest on their deposit at the prevailing rate.
- the investors capital is not exposed to investment risk
- the return simply comprises interest
- liquid asset.
Characteristics of notice accounts
Will usually pay a slightly higher variable rate of interest and instant access account in exchange for the investor having less access to the money.
- Some work on a very simple basis and require a period of notice before funds can be withdrawn typically between 30 and 120 days.
- Penalties may be levied for early access and this is typically equivalent to the interest for the period of the notice on the amount withdrawn, but some may have more complex rules, I.E.committing a limited number of Withdrawals without notice.
- One risk for the investor in the longer notice accounts is that the deposit taker may offer a higher initial rate to attract funds and then cut the returns sharply, leaving investors locked in for the notice period.
Characteristics of term deposit accounts.
- Banks and building societies also offer 10 deposit accounts typically from 1 to 5 years with a fixed rate of interest, but with no or limited access to capital before maturity.
- These accounts provide higher interest rates for investors who are prepared to leave money on deposit for a fixed period.
- These accounts are suitable for investors who want certainty of income, but are not appropriate for a rainy day cash funds.
Is the statement ‘cash investments are riskless’ true or false?
False
- Interest risk
- inflation risk
- default risk
Features of bonds
- The nominal value of a bond is £100 and is not the same as market price. Nominal amounts or par value, is used to determine the interest of maturity payments, as the bond nearest the end of its life as market price will approach the nominal amount.
- Bonds have a coupon which is the rate of interest payable on the bond. It is set at the time of issue and depend on market forces at that time, this is usually fixed for the life of the bond. The coupon is expressed in gross, and has calculated a simple interest on the nominal value of the bond. This interest is commonly paid twice a year.
Regular bond format is
(Name of issuer, coupon, mat date)
Characteristics of a Cum dividend
- The purchaser will receive the full six months interest even though the bond was earned by them for less than the entire period.
- Consequently, when the bond is purchased, the buyer has to compensate the seller for the interest to which they were entitled but did not receive.
- Buyer will pay the clean price plus the interest that has accrued from the date of the last interest payment to the settlement date.
