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CISI: Securities > Chapter 2: Asset Classes > Flashcards

Chapter 2: Asset Classes Flashcards

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1
Q

What are Redeemable Shares?

When can they be issued?

A
  • Shares offered by a company to shareholders, that may be bought back by the company at its election.
  • Companies can issue ordinary redeemable shares as long as non redeemable shares are also in issue.
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2
Q

Why are Preference Shares Less Risky?

A

This is due to the dividend policy (usually fixed) and they rank above ordinary shares in the event of bankrutpcy.

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3
Q

Do Preference Shares have Voting Rights?

When might this change?

A

No

This could change if dividends have not been paid for a while, that time is usually detialed in the constitution.

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4
Q

Why do Ordinary Shareholder Face the Greatest Risk?

Why can price fall? (Simple)

A
  • If the company is liquidated, they will only receive a “pay out” if there is money remaining after satisfying all creditors.
  • The value of the shares can also decline if demand falls.
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5
Q

What Happens to Ordinary Shares if a Company is Sufficiently Profitable?

A

Receive dividends, these are proposed by the directors and generally ratified by the shareholders at AGMs.

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6
Q

What is a Proxy?

A

A person/group appointed to vote on an investors behalf at an EGM or AGM.

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7
Q

What is the Nominal Value of a Share?

A

The minimum amount that the company must receive from subscribers on the issue of the shares.

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8
Q

What is a Partly Paid Share?

A

When a compmay has not demanded all of the nominal value at issue. At a later date the company will call the shareholders to pay the remaining value.

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9
Q

Are Ordinary Shares Registered or Bearer?

A

Register

Meaning there is a register of who holds the shares.

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10
Q

What is a Cumulative Preference Share?

A

A shareholder that will not only be paid this years dividends before ordinary shareholders, but also any unpiad dividends from previous years.

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11
Q

What is a Participating Preference Share?

Why are they a thing?

A

Shares issued to adress the drawback of fixed dividends in times of increased profits.

Allows the investor to participate in higher distributions, as well as extra distibutions during liquidation.

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12
Q

What is a Redeemable Preference Share?

A

Shares that enable the company to buy back shares at an agreed price in the future. This removes any obligation the firm then has to the shareholder.

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13
Q

What is a Convertible Preference Share?

A

Where the shareholder has the right but not the obligation to convert the preference shares into a predetermined number of ordinary shares.

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14
Q

What is a Zero Coupon Preference Share?

A

These are prefernece shares that pay no ordinary dividend, but offer capital gain.

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15
Q

Which Type of Shares are More Liquid?

And what does this mean?

A

Preference shares.

This may mean that normal prefenrce shares (without enhancements) typically underperform that of ordinary shares in a rising market.

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16
Q

What is the Redemption Date of a Bond?

A

The date when the borrower agrees to pay back the nominal value of the bond.

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17
Q

What is the Nominal Value of a Bond?

A

The par value, is the amount that would be paid back to the issuer on maturity.

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18
Q

What is the Coupon of a Bond?

A

The rate of interst paid, usually expressed as a % of the nominal.

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19
Q

What is the SOFR?

Why does it show?

A

Secured Overnight Financing Rate

This is the published interest rate that is referenced when deciding FRN coupons.

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20
Q

What is a FRN?

A

Floating rate note

Sates the coupon by refernece to a published interest rate, e.g. SOFR, and reset the coupon paid when the published interest rate changes.

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21
Q

What is an Index Linked Bond?

A

A bond that adjusts the principal and coupon based on prevailing inflation. They are index linked as they track, e.g. the CPI (consumer price index).

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22
Q

Pretty flat, pretty boring ; )

What is a Flat Yield?

What is its formula?

A

FY = (Annual Coupon / Price) x 100

Considers the coupon, but ignores the existence of any capital gain if the bond is held through redemption.

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23
Q

What is Gross Redmeption Yield?

What is it AKA?

A
  • Yield measure that takes into account both the coupons and any capital gain through to maturity into account.
  • AKA Yield to Maturity
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24
Q

What are the Disadvatnages of GRY?

Who can this benefit on the other hand?

A
  • It doesnt take into account any taxation.
  • This however can benefit not tax paying organisations, such as Pensions or Charities.
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25
Q

What is NRY?

A

Net redemption yield, take into account both annual coupons and the capital gain, but look at after tax cash flows.

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26
Q

If an Investor think Interest Rates will Fall, What Should They Invest In?

Simply, and why?

A

Fixed Interest Securities

Their prices will rise due to the inverse relationship between the two.

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27
Q

What is a More Volatile, a Lower Coupon or a Higher Coupon Bond?

To a change in interest rate.

A

Lower Coupon

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28
Q

What is a More Volatile, a Longer Dated or a Shorter Dated Bond?

To a change in interest rate.

A

Longer Dated

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29
Q

What is Modified Duration?

A

The MD of a particular debt instrument shows the expected change in its price, given a specified change in interest rates.

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30
Q

What is the Rule of Modified Duration?

What is the relationship?

A

The higher the modified duration, the more the price of that istrument will move

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31
Q

Conversion Ratio Equation?

A

Conversion Ratio = Nominal Value / Conversion price of shares

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32
Q

What Would Happen to a Convertable Bond During a 1-for-1 Bonus Issue?

A

The conversion price would halve and the conversion ratio would double.

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33
Q

What are the Limitations of Flat Yield Calculations?

A
  1. Its only accounts for coupon flows and ignores redemption flows.
  2. Ignores the timing of any cash flows because there is no discounted cash flow anaylsis
  3. If a bond has a FRN, then it does not take into account the varying interest rates.
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34
Q

What are Flat Prices?

Flat is boring ; )

A

These are listed bond prices that do not include accrued interest.

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35
Q

What are Clean Prices?

These are also?

A

Another name for the flat price of the bond.

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36
Q

What is Accrued Interest?

A

This is interest that has been earned, but not yet paid.

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37
Q

What is the Accrued Interest Formula?

A

Accrued Interest = Coupon x Number of days since last payment / Number of days between payments

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38
Q

What is the Dirty Price of a Bond?

Opposite to clean…..obviously.

A

The flat price of a bond including the accrued interest.

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39
Q

What Happens to the Dirty Price of a Bond as Time Goes On?

Dirty like a motocross track.

A

The price will rise in situe with the amount of interest accrued, then once the payment has been made (interest) it immediatley drops again. Up and down.

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40
Q

What are the 4 Day Count Conventions?

For accrued interest

A
  • ACT/360
  • 30/360
  • ACT/365
  • ACT/ACT
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41
Q

ven

What is a Spread in a Bond Market?

A

The difference between two yields, usually expressed in basis points (1/100 of %)

Bond A = 5.5% and Bond B = 5% the spread is 50 basis points (0.5%)

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42
Q

What are Bonds Usually Benchmarked Against?

What are examples of one examples?.

A
  • Government yield bonds
  • Swap Rates
  • Published reference rates (LIBOR or SOFR)
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43
Q

What is a Yield Curve?

And why is it used?

A

A graph that shows the relationship between the Gross Redemption Yield and Time Until Maturity.

This illustrates the yields availible to investors in Gov bonds over different time horizons.

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44
Q

What does a Normal Yield Curve Capture?

What does this show about investors and why?

A

The fact investors have a liquidity prefernece, that being more liquidity.

They are willing to accept a lower yield on more liquid short dates government bonds, and demand a higher yield on less liquid long dates government bonds.

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45
Q

What would cause an Inverted Yield Curve Scenario?

A

This occurs when short term government bond yields surpass long term government bond yields, indicating an anticipated reduction in interest rates.

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46
Q

What does an Inverted Yield Curve Say About Investors?

Why would they think like this?

A

They are willing to accept lower yields for long term bonds, anticipating future rate drops, while demanding higher yields for short term bonds.

Showing that their confidence in rate change, outweighs liquidity preferences (Impending DOOM!)

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47
Q

What are Negative Rates?

Why are they used?

A

This involves banks having to pay to leave their cash with central banks to encourage lending, to boost the economy.

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48
Q

What are the Concerns with Negative Rates?

A
  • Switch out deposits into cash, leaving the banking system and affecting profits.
  • Pension funds and insurers investment scope will be limited, due to risk appetites.
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49
Q

What is the Relationship Between Yields and Inflation?

Positively corre…….

A

If inflation is expected to increase, then yields demanded by investors also rise to reflect this.

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50
Q

Why Might Yields Fall When Central Banks Raise Interest Rates to Combat Inflation?

A

This is because invetsors have confidence that inflation will be stopped in the short term due to the pre emptive actions by the central bank.

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51
Q

What is the Relationship Between Interest Rates and Bond Prices?

A

If interest rates across financial markets decreases, then the quoted price of government bonds will increase

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52
Q

Present Value of a Bond?

A

1 / (1+ r) N

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53
Q

What is the Ex-Dividend Period?

A

For most Gilts, this is 7 working days prior to the coupon payment date, thus dealt without the pending coupon.

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54
Q

What is meant by the Cum-Dividend Period when Selling Bonds?

A

For all remaining time that is not the Ex-Dividend, bonds are traded as Cum-dividend.

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55
Q

What Index is Used with Index-Linked Gilts?

Why is this still the case?

A

Retail Price Index

This is because it was contained in older prospectuses, thus was continued to be used.

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56
Q

What RPI is Used for Index-Linked Guilts?

What time frame?

A

After 2005, the RPI figure would need to be 3 months before the first coupon.

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57
Q

What is a “Deflation Floor?”

A

Where some soverign index-linked bonds, guarantee that the nominal will not sink below the original par value in a period of deflation.

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58
Q

What are the Most Common Negative Impacts of Inflation?

There are 3 (for consumers)

A
  • Reduces spending power
  • Increases the cost of living
  • May not be rewarded for saving
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59
Q

Real Interest Rate Calculation?

A

RIR = [(1 + Nominal Interest Rate) / (1 + Inflation Rate)] - 1

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60
Q

What will Happen to Bonds if Interest Rates Rise due to Inflation?

A

Bond prices will fall to bring the prices up to appropriate levels to reflect the interest rate increases.

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61
Q

What was the Consumer Price Index Formerly Called?

A

Harmonised Index of Consumer Prices

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62
Q

What is the Producer Prices Index (PPIs)?

What does it measure?

A

An index for the cost of production of goods (materials, plant etc)

This seeks to indentify inflation at an earlier stage.

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63
Q

What is a Zero Coupon Bond?

How are these profitable?

A

A bond that pays no coupon.

Investors make money by buying the bond for less than par value

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64
Q

What is the STRIPS?

A

Seperate trading of registered interest and principal of securities.

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65
Q

What is meant by Stripping a Bond?

How does on profit from this?

A

This involves trafing the interest and principal seperatley.

Each strip will trade ar a discount to its face value.

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66
Q

Which UK Body Deems a Bonds Eligible to be Stripped?

(Me racing my nan! COME ONN!)

A

DMO

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67
Q

Which UK Bodies are Able to Strip Bonds?

A
  • GEMMs (Gilt Edged Market Makers)
  • Bank of Engalnd
  • UK Treasury
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68
Q

What are GEMMs?

A

Gilt-edged market makers

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69
Q

What is the Reconstruction of a Gilt?

A

When STRIPS are exchanged for a conventional gilts, with the UK DMO acting as the counterparty.

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70
Q

What is BRICS?

What does this represent?

A

Emerging government bond markets.
Brazil, Russia, India, China and South Africa.

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71
Q

What are Examples of Other Emerging Governmnet Bond Markets?

There are 4.

A

Indonesia, Mexico, Turkey and Malaysia.

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72
Q

What are “Frontier” Markets?

Do you have examples?

A

Countries with less developed markets and systems than the emerging markets.

Bangladesh, Bahrain, Mauritius and Sri Lanka.

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73
Q

What Risks Arise from Investing in Frontier or Emerging Markets?

Types of risks, what do these lead to? Geo………

A
  • Political and Economic volatility, leading to default risk.
  • Cross Border risks, resulting in currency risk.
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74
Q

Why is Debt Finance Safer than Equity Finance for an Investor?

In the same company

2 reasons.

A
  • Because Coupons need to be paid before dividends
  • If the firm goes into liquidation , the holders of debt would be paid before equity holders.
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75
Q

What Issues Does Raising Debt Finance Present to the Issuing Company?

Security / CF??

A
  • Investors may be able to claim some of the assets back, if coupons arent paid (Securitisation).
  • Interest on Bonds must be paid out of cash flow, failure will result in bankruptcy.
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76
Q

What is a Fixed Charge?

Secured Debt.

A

A debt that carries a charge over a specific asset.

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77
Q

What is a Floating Charge?

Secured debt, (could sink?)

A

Secured over a group of the companies assets, in default this would cover the avialible assets at that point.

78
Q

What are Bonds Issued with a FIxed Charge Commonly Reffered As?

Like old margarets teeth.

A

Debentures.

79
Q

What is an Asset-Backed Securities?

What do these come in the form of?.

A

Are bonds backed by a particular pool of assets, such as mortgages, credit card receivables or car loans.

80
Q

What are Mortgage Backed Securities?

Definition.

A

MBS are bonds that are created when a group of mortage loans are packaged for sale to investors.

81
Q

What are Examples of the Mortage Agencies of the US Governments?

And thier stupid wet little names (3 types, so american)

A
  • Government National Mortgage Association (Ginnie Mae)
  • Federal National Mortage Association (Fannie Mae)
  • Federal Home Loan Mortgage Corporation (Freddie Mac)
82
Q

What do Government Agencies do with MBS?

A

Buy qualifying mortgage loans, or guarantee pools of loans originated by financial institutions.

83
Q

What is a Tranche?

Big Short.

A

A section of class in an MBS or ABS.

These have a specific priority in relatin to interest and principal payments.

84
Q

What is an SPV?

A

Special Purpose Vehicle

85
Q

What does an SPV do?

A

Buys the assets from the orginators balance sheet, so that in the event of bankruptcy the SPV remians in tact with the pool of assets.

86
Q

What Enhancement Does a SPV Make to an MBS?

A

Enhances the creditworthiness of the ABS, giving them a higher rating than the orginator of the assets.

87
Q

What is a Covered Bond?

The simplest.

A

Senior secured debt securities of a regulated financial institution e.g. a bank.

88
Q

What is an Interesting Safety Feature of Covered Bonds?

Where collateral is sufficient.

A

If collateral is sufficient, they continue to be paid as per the original agreement after default.

89
Q

What is Different About a “Debenture” in the UK vs US?

A

In the UK it is a secured loan, whereas in the US its a loan without any security at all.

90
Q

What is a Note Trustee?

Main middle man?

A

Appointed to represent the interest of the holders of the securities, while providing guidance to the issuer.

91
Q

What is a Security Trustee?

Like a security guard for the……

A

The entity holding the various security interests created on trust for the various creditors, such as banks or bondholders.

92
Q

What is a Share Trustee?

A

Holds shares in an issuing SPV in order to ensure off balance sheet treatment for the originator of the transacion.

93
Q

```

~~~

What is a Successor Trustee?

Succession?

A

Role provided for banks who need to resign due to COI or when requirements exceed the banks capacity.

94
Q

What are the Benefits of a Trust Deed?

To the holder and the company.

A
  • Enables a coherent enforcement procedure, rather than a series of disparate actions. Allowing for organised legal repayment action.
  • The company does alson not need to defend a series of actions
95
Q

What Must the Corporate Trustee Keep Track Of?

Why?

A

All bonds sold to ensure that the amount issued is not greater that what is stated in the indenture.

96
Q

What is Senior Debt?

3 factors.

A
  • Ranks above all other debt and equity capital in the business.
  • Has to meet strict covenants.
  • Lowest rate of interest as is the safest.
97
Q

What is Subordinated Debt?

A
  • Ranks behind senior debt
  • Less stringent requirements
  • Interest rate is higher
98
Q

What is Mezzanine Debt?

A
  • Usually high risk subordinated debt
  • Returns and interest is much higher
  • Can also include warrants and options to participate in equity returns.
99
Q

What is “Payment in Kind”?

A

Interest that is not payed is added to the principal, to be paid at the end.

100
Q

What Benefit does Unsecured Debt Still Have?

Priority?

A

Paid before shareholders in the event of insolvency.

101
Q

What is Guaranteed Debt?

A

Where guarantee is provided by someone other than the issuer.

102
Q

What is an ICE LIBOR?

A

A published interest rate made by the Intercontinental Exchange Group.

103
Q

Who are JCR or GCR?

Skiing next year?

A

Japan Credit Rating Agency and Global Credit Rating Agency

104
Q

What are the 2 Prime Money Market Instruments?

A
  • T-Bills (US Gov)
  • Commerical Paper
105
Q

Typical Maturity of Cash Assets?

A

Less than 1 year.

106
Q

What are the Main Characteristics of Cash Deposits?

2 simple ones

A
  • The return comprises interest income with no potential return for capital growth
  • The amount invested is repaid in full at the end of the investment.
107
Q

Factors that Determine Interest Rate for a Cash Deposit?

The 4 variables for rates……if any

A
  • Larger deposits, better rate
  • Fixed term accounts require an investor to tie up funds, better rate
  • Instant access acounts, lower rate
  • Current account, lower rate, none at all
108
Q

What is the Difference Between Gross Interest and Net Interest?

A

Gross is the quoted rate for CDs before tax, net is after.

109
Q

Advantages of Investing in Cash?

3 easy factors…..LIS?

A
  • Liquidity
  • Interest
  • Safety
110
Q

Disadvantages of Investing in Cash?

What could go wrong?

A
  • Banks creditworthiness
  • Inflation
  • Interest Rates vary
111
Q

Consideration for Cash Deposited Overseas?

A
  • Currency conversion costs
  • Creditowrthiness of chosen institution
  • Tax treatment and mobility of funds
112
Q

What is a T-Bill?

What is the usual coupon…..wink

A

Treasuty bill issued and guaranteed by the US Government, between 1-12 months.
These pay no coupoun

113
Q

What is Commercial Paper?

A

Corporate equivalent to a T-Bill, issued at a discount to its nominal, less than one year.

114
Q

What is Asset-backed CP?

A

Is a short term ivestment vehicle with a maturity that is typically between 90-180 days. The notes issued will be backed y assets of the institution.

115
Q

What can Happen if a CP Payment is Missed by One Day?

Very peak for issuer.

A

Bankrutpcy proceedings.

116
Q

What is Dealer Paper?

A

Commercial paper, advertised by a broker on money markets.

117
Q

How Much Money can be Saved by Not Using an Intermediary?

USA - Commercial Paper

A

5 basis points.

0.05%

118
Q

What is Direct Paper?

A

Large instituions money, who have the presence to interact directly with an issuer, not through a market.

119
Q

What is a Repo?

Whay are they used? PAWN

A

Involves the initial sale of a financial instrument and at the same time a contractual agreement that the seller will subsequently buy back the same financial instrument for a specified price at a set future date.

120
Q

Who Enters a Reverse Repo Agreement?

A

The party that issues the funds in exchange for securities on the start date.

121
Q

What is the Repo Rate?

What is this the same as?

A

The differnece between what is paid on the start date vs end date, similar to interest rate.

122
Q

What Does the DMO Standing Repo Facility Do?

What are the conditions?

A

Enables GEMM, to enter into a reverse repo arrangement with the DMO, to cover a short position in gilts.

Must be above £5million nominal, for next day settlement, can be rolled foward for 2 weeks.

123
Q

What is a Eurobond?

Example.

A

Are bonds that are issued and sold outside of their home country, in any currency not native to the country. e.g. German bond in YEN

124
Q

What are the Stages to a Eurobond Issuance?

A
  1. Issuer appoints a lead manager (IB)
  2. Stablish a syndicate, to sell the bonds and become responsible for underwiting etc.
  3. Syndicate Distributes to its clients.
125
Q

Things to Consider for Eurobonds?

As a buyer you need to watch out for…….

A
  1. Bearer form (no register)
  2. Buyer is responsible for paying its own tax returns.
126
Q

What is Meant When a Security is Immobalised?

A

Bearer securities are kept safe in a depository, and annot be used in secondary market transaction.

127
Q

Where are Eurobond Trades Matched?

Using which system?

A

TRAX

128
Q

What is the Settlement Period for Eurobonds?

A

T + 2

129
Q

What is an ADR/GDR?

A

American Depository Receipt and Global Depository Receipt

130
Q

What is Grey Market Trading?

For how long is this ok?

A

When a bank receives notification that in the future, shares will be on deposit. As long as cash collateral is availible, can create and sell the receipt.

This can be good for up to 3 months before the underlying are purchased.

131
Q

Are ADRs Free From Currency Risk?

A

Yes.

Dividends will be converted by the depository from the company, and sent to the investor.

132
Q

Are ADRs Voting Shares?

Why may this change?

A

Yes. Have voting rights like ordinary voting shares.

Some cases do not havew this e.g. Non-Voting DRs in Thailand.

133
Q

What is the HMRC Stamp Duty on UK Depoistory Receipts?

A

0.5% of the purchase price

134
Q

What is the HMRC Stamp Duty on US Depoistory Receipts?

US is bigger……..

A

1.5% one off fee when the DR is created.

135
Q

What is a Warrant?

A

An instrument issued by a company that allows the holder to subscribe for shares at a fixed price over a fixed period.

136
Q

What Happens if a Warrant Holder Decides to Exercise?

A

The company will issue new shares.

137
Q

Why Would a Company Issue Warrants?

Why could this be massively beneficial?

A

The sale of warrants will raise money, and, more money will be raised if these are exercised.

If they arent, then the money raised could be considere free.

138
Q

What is a Covered Warrant?

How are they offered?

A

Are issed by firms, rather than the company whose shares the warrant enables the ivestor to buy.

In the form of call or put warrants.

139
Q

What is the Conversion Premium?

When it comes to warrants (think about it)

A

The price of the warrant plus the exercise price required to buy the shares, less the prevailing share price.

140
Q

0

What are the 2 Types of Currency Transaction?

A
  1. Spot Transactions
  2. A Forward Transaction
141
Q

What does Spot Rate Look Like?

What does it mean?

A

GBP/USD 1.1555 - 1.1645

  • Buyers rate £1 buys $1.1555
  • Sellers rate $1.645 buys £1

This is an example

142
Q

What does “Pm” Stand for in FX Forward Transactions?

How is it quoted?

A

Premium

It is quoted in CENTS (not dollars)

143
Q

What does “Dis” Stand for in FX Forward Transactions?

How is it quoted?

A

Discount

it is quoted in CENTS (not dollars)

144
Q

What is Arbitrage?

A

Taking advantage of a difference in price for the same security across multiple markets.

145
Q

What is Interest Rate Parity?

A

IRP results from recognising a possible arbitrage condition and arbitraging it away.

146
Q

What is the Interest Rate Parity Equation?

FX

A

£ Spot rate X [(1 + $ Short term interest rate) / (1 + £ Short term interest rate)]

For GBP/USD

147
Q

What are Examples of Non-Floating Currencies?

What do they peg them to?

A

Saudi arabia pegs its currency to the US dollar, or China pegs it to a basket of currencies.

148
Q

What is Purchasing Power Parity?

Whats an example of this?

A

If a basket of goods is £100 in the UK and $200 in the US, the the PPP states the spot rate should be 1:2

149
Q

What are Factors that Affect the Supply of a Currency?

For USD?

A
  • Purchasing foreign currencies for imports, increases USD supply in the market.
  • US residents investing overseas
  • Speculation
  • FED may sell USD to purchase additional currencies.
150
Q

What are Factors that Affect the Demand of a Currency?

For USD?

A
  • Demand for US exports
  • Foreign demand for US investment
  • Speculation
  • Currency rate managed by central banks e.g. the FED.
151
Q

What are Factors that Affect Foreign Currency Trading and Speculation?

A
  • When other markets (e.g. equities) are acting in an erratic manner
  • Release of central bank meeting minutes of announcements
  • Data such as Inflation, GDP or other economic data
  • Geopolitics
152
Q

What are the Risks Associated with Cryptocurrencies?

A
  • Volatility
  • Decentralisation
  • Lack of Regulation
  • Unsecured
  • Scalability
  • Susceptibility (Hacking)
153
Q

What is the Definition of a Collective Investment Scheme per the IOSCO?

International organisation of securities commissions.

A

They are:
* Invests in transferbale securities
* Is publicly marketed
* Is open ended

154
Q

How are Unregulated Collective Investment Schemes Usually Characterised?

A

Volatile, Illiquid, high levels of leverage and thus are regarded as speculative investments.

155
Q

What are the Main Risks with UCIS?

There are 7…….eeek

A
  1. Illiquid (can be 2.5 moths plus to receive proceeds after sale)
  2. Fixed or long term commitment
  3. No guarantee of capital gain or income
  4. High Charges
  5. Highly Geared
  6. Currency / Geopolitical
  7. Single Asset
156
Q

What is Redemption Moratoria?

For Open ended funds

A

Investors cannot sell back their units for a period or an extended redemption period.

157
Q

Do Structured Procucts Run for a Defined Term?

How long for?

A

Yes,

Typically 18 months, but no more than 7 years.

158
Q

What are the 2 Major Sub Categories of Structured Products?

A
  • Structured Deposits: Cash products that can only be offered by deposit accepting banks.
  • Structured Investments: A pre-packaged investment that is based on derivatives, a single security, a basket of securities, options, indicies currencies etc.
159
Q

What is a SCaRP?

A

Structured capital at risk product.

160
Q

What is a “Soft Floor”?

For structured products?

A

The investor will get all or most of their money back as long as their index does not fall past a certain proportion. If more the investor will suffer the loss.

161
Q

What is a Precipice Bond?

Was you misold PPI???!!!

A

Pays an attractive return, e.g. 10% pa for 3 years. But if its tracked index falls by more than a certain level over that period, then the bond fail.

162
Q

How is a Regulated Collective Investment Scheme Authorised?

locally and globally

A

Either authorised by the local financial regulator or, if they are from outisde the country by the local finance regulator.

163
Q

Can UCIS Be Marketed to Retail Investors?

A

No

164
Q

What is an Open Ended Fund?

Where are the shares traded?

A

Investment Fund that can issue and redeem new shares or units in the scheme at any time.

165
Q

sh

What is a Closed Ended Investment Company?

Where are the shares traded?

A

When the fund is first established a set number of shares are issued to the investing public, these shares are then subsequently traded on the stock market

166
Q

What is a Closed Ended Investment Company AKA?

A

Investment Trust

167
Q

**

What are the 2 Major Forms of Open Ended Schemes?

A

Unit trusts & OEICs

168
Q

What is an Authorised Unit Trust?

What must it be constituted by

A

Unit trust that is regulated and allowed to be marketed to the investing public, and must be constituted by a trust deed between a manager and the trust deed.

169
Q

What is the Role of the Manager of an AUT?

A
  • Marketing the unit trust
  • Managing the assets (in line with deed)
  • Maintained a record of units
  • Supply info on the investements to the trustee, when requested
  • Inform the FCA of any breaches
170
Q

How are Units in an AUT Bought and Sold?

A

Could be via a newspaper or over the phone / internet. WIll require payment or proof of funds to be issued a contract.

Can be sold back the same way they bought them.

171
Q

How are Unit Trusts Priced?

What is the usual spread?

A

At the valuation point (time each day), could be a spread of 5-7% or a single price.

172
Q

How are Charges Levied to an Investor in a AUT?

There are 2

A

On subscription (when bought) or when sold, these depend on the underlying assets and how long the investor has held, usually** 3-6.5%**

Annual management charges 0.5-1.5% depending on the holding and how the portfolio is managed.

173
Q

What is an ICVC?

Another name for OEIC

A

Investment Company with Variable Capital.

174
Q

Does a Holder of an OEIC, Entitle them to a Share in the Profits?

A

Yes

175
Q

What is an Umbrella Fund?

A

A fund with a number of seperatley priced sub funds, adopting different investment stragtegies or denominated in different currencies.

176
Q

Is an Investment Trust a Trust?

A

No, it is actually a company

177
Q

How are Investment Trusts Prices Quoted?

How can they be bought??

A

Two way - Bid and Offer Spread.

Through a stock broker.

178
Q

How is the NAV Calculated?

What does it consist of?

A
  • The value of the trusts listed investments at mid market prices.
  • The value of its unlisted investments at the directors valuation
  • cash and other net current assets

MINUS liabilities or preffered capital at nominal.

This is then divided by the number of shares, to give NAV per share

179
Q

Do Investment Trusts Operate at a Discount to NAV?

A

YES, to relate to the demand of sales or any factor that affects this.

180
Q

What can Closed Ended Funds do that Open Ended Funds Cant?

3 main

A
  • Invest in unquoted private companies as well as quoted
  • Provide venture capital
  • Borrow more money (greater gearing, but can cause greater risk)
181
Q

What has Greater Volatility, Closed Ended or Open Ended?

A

Closed.

Because it is succeptable to market price fluctuations.

OEICs track and is always based on the underling assets.

182
Q

How are ETFs Managed?

A

Generally passively

183
Q

Are ETFs Open Ended?

What are the provisions of this though?

A

Yes.

But units are usually only created and redeemed by large institutional clients, buying blocks, 10,000s or shares.

184
Q

What are Cost Benefits of ETFs

Tracking Impact?

A

Usually cheaper

185
Q

What is the Difference Between Physcial and Synthetic ETFs?

A

Physical funds actually hold the securities.

Synthetic enter contarcts with counterparties, using derivatives to track the underlying stock.

186
Q

What is a Exchange Traded Note?

A

Structure investment products that are senior debt notes typically issued by large banks

187
Q

Are ETFs Liquid?

When might this not be the case?

A

Yes, during trading hours.

Underlying holdings can be very illiquid or traded OTC.

188
Q

What are Alternative Assets?

What are the asset types, or examples of?

A

Shares in a fund that turns specific illiquid investements into liquid investments, private equity or property.

189
Q

Why are Alternative Investments Being Closed Ended in Nature a Bad Things for the Investor?

A

It may require an investor to commmit to a long time frame, to allow the fund enough time to realise the expected returns.

190
Q

Do Private Equity Firms Use Leverage?

What does this mean for them?

A

Yes.

Which means they may be succeptable to rate changes and credit crunchs.

191
Q

Are Private Equity Firms, Limited Companies?

A

Yes, usually.

CISI: Securities (11 decks)

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