Chapter 3 Flashcards
Characteristics of the principal asset classes
Cash instruments
Equities
Property
Cash investments or instruments take two main form
Cash deposits
money market instruments
Comprise accounts held with banks or other savings institution.
Cash deposits
they are held by a wide variety of depositors from retail investors through to companies, governments and financial institutions
cash deposits
are more economical for a bank to process and will earn a better rate
large deposits
involve the investor tying up their money for a fixed period of time such as one, two or three years, or which a fixed period of notice has to be given
Fixed-term deposits
typically earn the lowest rates of interest of the various deposit accounts available
instant access deposit accounts
this will generate an even lower rate and sometimes pay no interest at all
Current or checking account
interest received by an individual is subject to
income tax or final tax
the headline rate of interest quoted by deposit takers before deduction of tax
gross interest
the rate of interest after tax is deducted
net interest
Advantages of investing cash
liquidity
savings vehicle and for the interest return that can be earned on them
relative safety that cash investments have and that they are not exposed to a market volatility
it is usually protected by a government sponsored compensation scheme
deposits
this will repay any deposited money lost at a maximum deposits of
500k per depositer per account
when cash is deposited overseas, depositors should also consider the ff
the cost of currency conversion
the creditworthiness of the banking system
the tax treatment of interest applied to the deposit
are the wholesale or institutional markets for cash and are characterized by the issue, trading and redemption of short dated negotiable securities
money markets
these can have a maturity of up to one year, through three months or less is more typical
money markets
are long term providers of finance for companies, either through investment in bonds or shares
capital markets
often subject to a relatively high minimum subcription and therefore tends to be more suitable for institutional investors
direct investment in money market instruments
examples of main types of money market instruments are
treasury bills
certificate of deposits
commercial paper
these are usually issued weekly by or on behalf of governments, and the money is issued to meet the governments short term borrowing needs
treasury bills
are non-interest bearing instruments
treasury bills
sometimes referred to as zero coupon instruments
treasury bills
these are issued by banks in return for deposited money
certificates of deposits
it is a short term marketable instruments with a maturity of up to 5 years, although the vast majority are issued for periods of less than 6 months
certificates of deposits
this is the corporate equivalent of a treasury bills
commercial paper
is issued by large companies to meet their short term borrowing needs
commercial paper
is simply evidenced by holding the instruments although, in practice, these are immobilized centrally in vaults by central securities depositories or similar agencies
Ownership
is a highly professional market that is used by banks and companies to manage their liquidity needs
money market
it is essentially a savings account that typically requires a substantial minimum balance and notice period
money market account or money market deposit account
is actually a money market mutual fund
money market fund
a collective investment scheme which pools investors money to invest in short term debt instruments such as treasury bills and commercial paper
money market fund
can be used as a temporary home for idle cash balances rather than using a standard retail deposit account
money market deposit accounts
for this investor, these accounts can at times offer higher returns that can be achieved on standard deposits, and are offered by most retail banks
retail investor
can be the vehicle for holding such asset allocations and are in competition with other short term deposit accounts
money market investments
are essentially IOUs
bonds
types of bonds
government bonds
supranational bonds
corporate bonds
generally less risky than shares, providing that their issuers remain solvent
bonds
issued by national governmemts
government bonds
are issued by agencies such as the european investment bank and the world bank
supranational bonds
are issued by companies such as large banks and other large listed companies
corporate bonds
investments such these have been regarded as being of particularly low risk as it has been regarded as unlikely that a government will default
government bonds
can face more real default risks, namley that the company could go bust
corporate bonds
the major reason an investor would prefer equities over bonds is the potentially greater benefits that can arise from owning shares
dividends
each individual property is unique in terms of
location
structure
design
is subjective, as property is not traded in a centralized market, and continuous and reliable price data is not available
valuation
is subject to complex legal considerations and high transaction costs upon transfer
property
refers to the trading of one currency for another, it is by far the largest market in the world
forex market
aimed to prevent speculation in currency markets by fixing all currencies to gold at a fixed rate of 35 dollar per ounce
bretton woods agreement
trading in currencies became 24 hour as it could take place in the various time zones
asia
europe
america
it is located between the asian and american time zomes
london
other large centres includes
us
singapore. hongkong
japan
the most commonly quoted currency pairs are
us dollar and the japanese yen
euro and us dollar
us dollar and swiss franc
british pound and us dollar
when currencies are quoted the first currency is the and the second is the
base currency
counter or quote currency
is always equal to one unit of that currency, in other words, one pound, one dollar or one euro
base currency
when the exchange rate is going up, it means that the value of the base currency is rising relative to the other currency and is referred to
currency strengthening
and when the opposite isbthe case the currency is said to be
weakening
when currency pairs are quoted, a… will quote a bid and ask price
market maker or forex trader
is an otc market where one brokers or dealers negotiate directly with one another
forex market
types of transactions undertaken in forex market
spot transactions
forward transactions
futures
swaps
is the rate quoted by a bank for the exchange of one currency for another with immediate effect
spot rate
in this type of transactions, money does not actually change hands until some agreed future date
forward transactions
standardized versions of forward transations that are traded on derivatives exchange
futures
in this, two parties exchange currencies for a certain length of time and agree to reverse the transactions at a later date
swaps
is an agreement between two parties to either buy or sell foreign currency at a fixed exchange rate for settlement at a future date
forward exchange contract
is typically achieved through the same settlement systen that is used for equities and bonds, and is commonly settled on the day of the trade or the ff business days
settlement of stock market trades
2 major advantages of money market funds than money market accounts
pooling of funds with other investors
returns on money market fund is greater than money market accounts
is the exchange rate set today, even though the transaction will not settle until some agreed point in the future
forward exchange rate
