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CISI International Certificate in Wealth & Investment Management > Chapter 3: Asset Classes > Flashcards

Chapter 3: Asset Classes Flashcards

1
Q

Cash investments take 2 main forms, what are they?

A
  1. Cash deposits

2. Money market investments

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2
Q

What is the effect of negative interest rates?

A

Banks & other financial firms have to pay to keep their excess reserves stored at the central bank rather than receiving positive interest income.

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3
Q

What are treasury bills?

A

Bills that are issued by governments at a discount to par and are redeemed at their nominal value. Bills are usually issued for 3/6/12 months and can be redeemed for a percentage (1%) more than what they were issued for. They are monetary policy instruments that absorb excess liquidity in the money market.

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4
Q

Which money market instrument can be described as a negotiable bearer security issued by commercial banks in exchange for fixed-term deposits?

A

CDs - Certificated of Deposit.

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5
Q

What is the corporate equivalent of a treasury bill?

A

Commercial Paper - an unsecured negotiable bearer security, issued by companies that are listed on the stock exchange.

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6
Q

What are the 4 types of money market instruments?

A
  1. Treasury Bills
  2. Certificates of Deposit
  3. Commercial Paper
  4. Bills of Exchange
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7
Q

What’s the difference between a retail bank account and a money market account?

A

A money market account is a short term home for cash that is primarily for large amount of funds, they usually offer higher returns than a retail account.

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8
Q

What is a bond?

A

A bond is a debt security, a loan to a government or corporation. The issuer of the bond is required to repay the principal on a specified maturity date.

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9
Q

In terms of bonds, what is the principal?

A

Principal - the amount of money owed by the issuer

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10
Q

In terms of bonds, what is the coupon?

A

Coupon - the annual interest payments to the bond holder

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11
Q

What is a ZCB (zero coupon bonds)?

A

ZCB - Bonds that are sold at a discount to their face value & do not pay an annual interest payment but are simply paid back at the maturity date.

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12
Q

What are some risks associated with bonds?

A
  1. Default risk - issuer fails to pay
  2. Inflation - inflation rate out runs bond interest rate
  3. Interest rate risk - As interest rates go up, the value of the bond falls
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13
Q

What is an ‘irredeemable’ bond?

A

A bond with no repayment date.

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14
Q

Can you trade bonds?

A

Yes - once issued, bonds are negotiable - they can be traded the open market & be sold before their redemption date.

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15
Q

In terms of bonds, what is the par value?

A

The par value or nominal value is basically the price of the bond when it’s issued & redeemed.

The market price is determined by interest rates and differs from the par value.

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16
Q

Is a the coupon rate paid based on the par value or the market price?

A

It’s the par value, the price that it’s issued at.

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17
Q

A bond market price that excludes any interest incurred since the last interest payment is what type of price?

A

Clean price.

As oppose to a dirty price that includes the interest that the bond has incurred since the last interest payment.

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18
Q

How do you calculate a flat yield?

A

Flat yield = (coupon/clean price) x 100

e.g.
coupon of 2.375%
clean price of $121.50

1.95% = (2.375 / 121.5) x 100

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19
Q

What is gross redemption yield?

A

Yield to maturity or redemption yield is a combination of flat yield plus the gains/losses incurred if bond is held until redemption. This gives an average annual compound return.

20
Q

What is the effect of rising interest rates on bond market prices?

A

Bond prices decrease as interest rates increase. A discount on the bond’s par will make it more competitive if the bond’s coupon is lower than the interest rate.

21
Q

The inability to reinvest bond coupons at the same rate of interest as the GRY (gross redemption yield) is know as what?

A

Reinvestment risk.

22
Q

If a government issues a bond with a coupon rate of 5%, interest rates are also 5% and then a year later, interest rates increase to 10%, what will happen to the market value of the bond?

A

The market value of the bond will fall. This is because the yield on the bond is no longer competitive in comparison with interest rates and therefore the resale value will fall to compensate.

23
Q

What is the yield curve?

A

It is a way of comparing yields on a number of securities that each have different maturities. Usually the longer the maturity, the higher the interest rate.

24
Q

What are some of the different types of bonds?

A
  1. Bills - maturity < 1 yr
  2. Notes - maturity = 1 - 10 yrs
  3. Bonds - maturity > 10 yrs
  4. Zero coupon bonds - no coupon but issued at a discount to par value
  5. Mortage-backed securities (MBSs) - combination of a bank’s mortgages into one bond.
  6. Securitised assets - e.g. bank loans - A package of all repayments a bank receives into a single bond.
  7. Investment-grade corporate bonds - high credit quality. (BBB+)
  8. High yield bonds - aka junk bonds. Large risk & therefore large reward in the form of a higher coupon.
25
Q

What are cocos (Contingent convertible bonds) ?

A

Cocos are bonds that can be converted into equity if a pre-specified trigger event occurs.

26
Q

What are the 3 risk categories assosiated with property investment?

A
  1. Property risk - location, tenants, lease length, etc
  2. Market risk - interest rates, rental income growth.
  3. Investment Vehicle risk - liquidity, diversification.
27
Q

What is the difference between a Closed-end & Open-end fund?

A

A closed-end fund (CEF) is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund.

Unlike open-end funds, new shares in a closed-end fund are not created by managers to meet demand from investors.

Instead, the shares can be purchased and sold only in the market, which is the original design of the mutual fund, which predates open-end mutual funds but offers the same actively-managed pooled investments.

28
Q

What are the 2 types of shares?

A
  1. Ordinary shares

2. Preference shares

29
Q

What are preference shares?

A
  • Holders get dividends before ordinary stock holders
  • Preference get cumulative dividends if not paid in previous year.
  • Holders don’t usually have voting rights.
30
Q

What are some types of preference shares?

A
  1. Participating preference shares - entitled to participate in the company’s profits if ordinary dividend exceeds pre-specified value.
  2. Redeemable preference shares - predetermined redemption price & date.
  3. Convertible - can be converted to ordinary shares.
31
Q

What is an ADR (American depositary receipt)?

A

ADR - a negotiable certificate issued by the US depositary bank representing a number of shares of a foreign company’s stock. (Traded on the US stock markets)

32
Q

What is a warrant (in terms of an asset class)?

A

Essentially a long-dated call option. They are traded on the stock exchange.

33
Q

Paying a dividend sum larger than this years profits is known as a what?

A

Naked/uncovered dividend.

34
Q

What could be defined as a ‘corporate action’?

A

When a public company does something that affects it’s shareholders in an event that affects the securities issued by the company.

There are 3 classes of action:

  1. mandatory
  2. mandatory with options
  3. voluntary
35
Q

What is an example of a voluntary corporate action?

A

An action that requires the shareholder to make a decision e.g. a takeover bid - shareholders vote on whether to accept a takeover bid or not.

36
Q

What is an example of a mandatory corporate action?

A

An action that does not require the intervention of the shareholders e.g. dividend payment.

37
Q

What are some types of corporate action?

A
  • Bonus issue - issue more shares to existing holders
  • Consolidation - reverse split
  • Final redemption - repayment of a debt security (bond)
  • Subdivision - stock split
  • Warrant exercise - long-date call option
  • Rights issue - offers existing investors discounted shares
  • Placings - similar to IPO, new shares sold on market
38
Q

What is a derivative?

A

A financial instrument that derives from something else. The price is based on an underlying asset. The underlying asset could be a stock, commodity or bond.

Future & options are commonly used derivative instruments.

39
Q

A legally binding agreement between a buyer & seller where the buyer agrees to pay a prespecified amount for a particular quantity of an asset at a future date is the definition of which derivative?

A

A future.

40
Q

An option to buy (but not obligated to) a specified quantity of an asset at the strike price on or before a future date is the definition of which derivative?

A

An option.

41
Q

What are the 2 types of options?

A
  1. Call (BUY) - buyer (holder) has right to buy at strike price
  2. Put (SELL) - buyer (writer) has right to sell the asset at strike price
42
Q

If you buy a ABC call at 1000 for a premium of 20 and on the expiry date, ABC’s share price is 1030, what is the return on the investment?

A

(1000 - 1030) - 20 = 10
10 / 20 = 0.5
0.5 = 50%

43
Q

In terms of commodity groups, what would be in the group of ‘Softs’?

A
  • Cocoa
  • Coffee
  • Orange Juice
  • Rapeseed
  • Spices
  • Lumber
  • Pulp
44
Q

What is a put provision & why might an investor exercise this option?

A

It is a feature of a bond which gives the investor the option to force the issuer to repurchase the bonds prior to maturity.

Investor’s may exercise this option when interest rates rise and the bond does not provide comparable gains.

45
Q

What is a ‘crack spread’?

A

A term used in the oil industry to describe the difference between the price of crude oil & the petroleum products extracted from it.

The spread approximates the profit margin that an oil refinery can expect to make by “cracking” the long-chain hydrocarbons of crude oil into useful shorter-chain petroleum products.

CISI International Certificate in Wealth & Investment Management (4 decks)

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