Chapter 1 - Cash Investments and Fixed-Interest Securities

Question 1

Types of tax-free savings accounts

Answer 1

• ISAs
• Premium Bonds

Question 2

Types of income accounts

Answer 2

• Income Bonds
• Guaranteed Income Bonds
• Guaranteed Growth Bonds
• Green Savings Bonds

(monthly income with interest paid gross but taxable)

Question 3

Types of Savings Accounts

Answer 3

• Investment Account
• Direct Saver

Question 4

Money Market Investments

Answer 4

• Banks/building societies lend/borrow from each other
• Requires high liquidity
• Limited private investments
• Allows borrowers to obtain funds at a fixed price for a fixed period
• Allows lenders instant access to funds

Question 5

Characteristics of a Treasury Bills

Answer 5

• Issued by the government to finance daily cash flow
• Routinely issued at weekly auctions
• 1/3/6 month maturities
• No interest paid (issued below par and reissued at par on maturity)
• Government backed and highly liquid

Question 6

Characteristics of a Certificates of Deposit

Answer 6

• Receipts from banks for deposits placed with them
• Fixed rates of interest
• Interest paid at maturity
• Interest rate depends on market rates and banks credit rating

Question 7

Characteristics of a Commercial Bill

Answer 7

• Short-term negotiable debt instruments issued by companies
• Issued at discounted maturity value
• Typical maturities of 30-90 days
• Unsecured
• Reduced liquidity

Question 8

Short-term Money Markets

Answer 8

• Maturity of 60 days
• Average life of 120 days

Question 9

Standard Money Markets

Answer 9

• Maturity of 6 months
• Average life of 12 months

Question 10

Fixed redemption value

Answer 10

PAR

Question 11

Coupon

Answer 11

Rate of interest payable

Question 12

Interest Yield (running yield, flat yield, income yield or current yield)

Answer 12

Coupon (interest) / Clean Price X 100

Question 13

Redemption Yield

Answer 13

Interest Yield + or - gain/loss at maturity / number of years to maturity / clean price X 100

Question 14

Bond Yields

Answer 14

Measures returns in relation to market price

Question 15

Yield Curves

Answer 15

A way of comparing yields on bonds of different maturities as well as an indication of market expectation

Question 16

Normal Yield Curve

Answer 16

Rising positive curve, higher yields for longer terms

Question 17

Flat Yield Curve

Answer 17

Income similar for long and short term

Question 18

Inverted/reverse Yield Curve

Answer 18

Yields on longer-term bonds are less than short-term bonds

Question 19

Short GILTS

Answer 19

Less than 7 years

Question 20

Mediums GILTS

Answer 20

7-15 Years

Question 21

Longs GILTS

Answer 21

15 Years +

Question 22

Repo Market

Answer 22

Sale and repurchase agreement

Question 23

Strips Market

Answer 23

Conventional GILTS are split into interest and redemption payments

Question 24

Corporate Bonds

Answer 24

Allows companies to borrow money for long periods at a fixed rate of interest (greater risk)

Question 25

Debentures

Answer 25

• Written acknowledgement of debt which is established by a trust deed
• Can have a fixed charge (charged over a specific asset) or a floating charge (general charge over company asset)

Question 26

Convertible Bonds

Answer 26

Loan stock (bond) offering holders the option of converting to ordinary shares