Chapter 2 Flashcards
1
Q
What are the key characteristics of money?
A D D U L T
A
- Acceptability
- Divisibility
- Durability
- Uniformity
- Limited Supply
- Transportability
2
Q
What’s the maximum yearly contribution to an ISA?
A
£20,000
3
Q
What’s the maximum yearly contribution to an Lifetime ISA?
A
£4,000
4
Q
What’s the maximum yearly contribution to an HTB ISA?
A
£200/m £2400/year
5
Q
What’s the maximum yearly contribution to an JISA?
A
£9000
6
Q
How much does the FSCS cover in the event of a bank insolvent?
A
£85,000
7
Q
Whats the role of the Sterling OVerninght Index Average (SONIA)?
A
set interest rate that banks pay to borrow overnight from other fin institutions and institutional investors
8
Q
Give 4 examples of money market instruments
T B C C
A
- T-bills
- Banker’s acceptances (BAs)
- Certificates of Deposit (CDs)
- Commercial Paper (CP)
9
Q
What are banker’s acceptances?
A
short term credit investments issued by firms
10
Q
What are certificates of deposits?
A
Time deposits with the bank
11
Q
What are commercial papers?
A
Unsecured IOUs by large banks or corporations to meet their short-term financial obligations
12
Q
What are T-Bills?
A
Money market securities issused and fully backed by the guarantees of a UK sovereign
13
Q
What are the requirements for an asset to be risk-free?
A
- No default risk
- No reinvestment risk
14
Q
Three different measures of inflation
A
- CPI
- RPI
- PPI
15
Q
What is offshore banking?
A
Banking in a different financial regulatory regime from one’s own country
16
Q
What are the benefits of offshore banking?
A
- multi currency accounts
- services not available from domestic banks i.e. anonymous bank accounts
- stable political/economical jurisdictions
17
Q
What are the risks of offshore banking?
A
- exchange rate risk
- security of the institution
- Home country clamping down on abuse re offshore finance
18
Q
Tax implications of offshore banking
A
- no tax / receive gross
- need to declare income to HMRC
19
Q
What is a bullet bond?
A
Single maturity date bond
20
Q
What’s an iredeemable nond?
A
bond with no maturity date
21
Q
What does it mean when a bond is redeemed at par value?
A
When nominal value of bond is redeemed at redemption date
22
Q
What is a redeemable bond at a premium?
A
When bond redeemed at a premium to nominal value
23
Q
When can dual-dated bonds be redeemed?
A
- When the issuing company calls the bond
- The latest redeemable date
24
Q
What is a convertible bond?
A
When there is option to covert bonds into ordinary shares at redemption date
25
What is a floating rate security?
When coupons change depending on external reference rate i.e. interbank rates
26
Whats in index linked bond?
When maturity value and coupon are linked to a specific inflation index
27
Who issues bonds?
- Sovereign governments
- Local authorities
- Companies
- Supranational bodies i.e. IMF and the World Bank
28
What is the nominal yield?
The quoted coupon rate of a particular issue
29
What is the current yield?
The current income from a coupon as a percentage of its price (C/P)
30
What is the gross redemption yield (GRY) or yield to maturity (YTM)?
- the expected rate of return if bond held to maturity
31
What are the two assumptions in GRY or YTM?
- bond held to maturity
- all coupons reinvested at the promised yield
32
What is the promised yield to call
Expected rate of return for a bond held to the first call date
33
What is the Realised (horizon) yield
the expected rate of return for a bond that is likely to be sold at some date before the bond matures
34
What determines GRY of a bond
C L E R T
- Credit risk
- Liquidity premium
- Expected rate of inflation
- Real risk-free rate
- Term premium
35
Give three economic factors that can impact ona rise in the GRY
- Increase in real growth rate
- Tight monetary credit conditions
- a rise in expected inflation
36
What are risks of bonds?
C I L I F
- Credit
- Interest and Inflation
- Liquidity
- Issue specific
- Fiscal and Currency Risk
37
For bonds, what is credit risk?
issuer defaults on obligation to pay coupons and repay principal
38
For bonds, what is interest rate risk and inflation risk? (3)
- inverse relationship between bond price and yields
- if interest and inflation go up
- price go down
39
What is liquidity risk for bonds?
The harder to sell the more risky the bond is perceived
40
What is Fiscal and Currency Risk for bonds?
- Tax might increase
- risk that purchasing power decrease because of change in currency conversion rate
41
For bonds, what is issue-specific risk?
- issue specific to bond
- i.e. right to call for early redemption
42
What are two types of active bond management?
- Interest rate anticipation
- Yield curve positioning
43
What is interest rate anticipation?
- forecasting interest rate
44
Give three different types of yield curve positioning
- Barbells and bullets
- Ladders
- Riding the yield curve
45
What is a barbell bond portfolio (2)
allocate funds to short and long dates
lowest allocations to intermediate securities
46
What is a bullet portfolio?
concentrated position on similar dates
typically intermediate date bonds
47
What is a ladder portfolio?
equally spreading out investments accross maturities
48
What is a pure yield pickup swap?
swap low coupon to comparable high coupon bond
49
What other bonds can be used for diversification? (2)
- High yield bonds
- International bond
50
Advantage of high yield bonds
higher yield
51
Risk of high yield bonds
higher credit risk
more likely to default
52
Which bond has a higher correlation to equities?
Investment grade or high yield
High yield
53
Why is high yield more correlated to equities
closely linked to economic performance of company in question
54
Why does international bonds help with diversification?
lower correlation to domestic bond because of mismatch in economic cycles
55
What is an equity?
A share of ownership in a company
56
Three Characteristics of preference shares
- pay a fixed rate of dividend
- No security attach
- No voting rights
57
Two main motivations for buying shares
- income from dividends
- capital gains
58
What are the advantages of electronic platforms for buying and selling shares? (3)
- monitor investments any time
- lower dealing costs
- out of hours orders
59
Why does an increase in interest rates cause share prices to fall?
- Alternative investments, i.e. government bonds will become more attractive
- Higher costs of borrowing will dampen economic activity
60
Three common passive equity approaches?
- Buy and hold
- Indexation
- rebalancing
61
what is a buy and hold strategy?
- buying a portfolio of securities and holding them for a long period of time
62
For passive strategies, what is indexation?
- When a portfolio is made to perform the same as a benchmark
63
What is full replication? (2)
- hold all constituents of an index
- weighted according to relevant market proportions
64
What is stratified sampling portfolio? (3)
- used when full replication is not possible/difficult to obtain
- hold a sample of securities
- representative of primary characteristics of that index
65
For passive strategies, what is rebalancing?
- Realigning weightings of portfolio
- Do it periodically
- Weightings change as prices move
66
If bond yield curve is flat or inverted, what equity investment strategy outperforms?
- Growth style stocks and indices
67
If bond yield curve is flat to steeper, what equity investment strategy outperforms?
- Value stocks
68
What are the three categories of commodities?
- Hard commodities
- Energy commodities
- Soft commodities
69
What is included in hard commodities?
metals and diamonds
70
What is included in energy commodities?
Crude oil and natural gas
Biofuels
71
What is included in soft commodities?
- Agricultural products inc. wool, coton and foodstuffs
72
Are soft commodities perishable?
Yes
73
What other factors can affect supply of soft commodities? (4)
- Good/poor harvests
- disease affective livestock
- exceptionally good/bad weather
- political unrest in producing country
74
What are the direct ways to invest in commodities? (2)
- cash market
- futures market
75
Main three characteristics of buying commodities in cash market?
- Usually used by user of commodity
- immediate delivery
- Possible to use London Metal Exchange (LME) for non-deteriorating commodities
76
What is a futures contract? (3)
- An agreement to buy or sell
- a standard quantity of a specified asset
- on a fixed future date at a a price agreed today
77
What are the four Characteristics for a future contract
- Standardised quantity
- Homogenous and specified asset
- Fixed future date
- Price agreed today
78
What are the advantages of direct commodity investment? (2)
- diversification, historically different rreturn from other asset classes
- hedge against inflation
79
What are the disadvantages of direct commodity investment? (3)
- leverage magnifies loss
- very volatile
- volatility influenced by macroeconomic factors
80
What are the advantages of indirect commodity investment? (5)
- low correlation with bonds
- ETCs very liquid
- funds pay dividends
- low holding/storage costs
- min dealing size more manageable
81
What are the four disadvantages of indirect commodity investment?
- Exchange traded commodities does not give access to entire commodity market
- only tracks small handful of commodities
- funds may invest in companies not the commodity
- not the same as owning the commodities
82
What are the three different types of commercial property?
- Retail
- Offices
- Industrial
