Chapter 3 - Financial Assets and Markets Flashcards
What are the advantages to investing in cash?
LiquidityInterest that is earned on it
What are the disadvantages to investing in cash?
1) creditworthiness of the deposit taking institutions 2) inflation reduces interest income3) interest rates vary4) currency risk when held offshore
Who protects deposits and to what amount in the UK?
£85k per person by the FSCS (financial services compensation scheme)
What maturity do money markets have and how are they offered to the market?
They have a maturity of up to a year with 3 months or less being most typicalThey are bearer securities issued at a discount to par
What are the 3 main types of money market instruments?
1) Treasury Bills - issued weekly by the debt management office (DMO) on behalf of the treasury. Discount at par2) certificate of deposits (CDs) - issues by banks in return for deposited money. Bought and sold in the same way as shares3) Commercial paper (CP) - corporate equivalent of a treasury bill. Also a zero coupon, issued at a discount to par. Normally have good credit rating or backed by a IB as they are unsecured (ie. No assets to back them). Limit of £150m - advantage to the company as this is cheaper than an overdraft with a bank.
Who issues treasury bills?
Issued weekly by the debt management office (DMO) on behalf of the treasury.
What are the 6 unique features of investing in property?
1) Each property is unique2) valuations are subjective3) complex legal considerations and high transaction costs4) illiquid5) property can only be bough in entire units6) land is finite (supply is limited) therefore price is mainly by demand
As a private investor, how do you diversify your portfolio in property without buying houses or money markets?
Property - indirect through collective schemes, property bonds or shares in property companiesMoney markets - only offered to the professional markets but you can get exposure through money market funds
On FX exchanges how are currencies quoted? What’s the difference between American and European style?
First currency is the based currency (one unit), second is the counter or variable or quote currencyAmerican style : $ is variableEuropean style : $ is fixed
Where is currency bought and sold?
OTC - brokers and dealers negotiate directly with one another
What are the types of FX transactions that commonly take place?
1) spot - immediate effect. T+2 settlement2) forward - money is exchanged in the future3) future - standardised forward transactions which are exchange traded4) swap - two party swap for a certain period of time
What is the difference between a forward and future FX transaction?
Forward - exchanges hand in the future on an agreed date. OTCFuture - standardised sizes and maturity dates. Traded on an exchange.
What is the difference between gross and net interest?
Gross interest is before tax deductionNet interest is after tax deductionTax is normally deducted on cash at a source rate of 20% and there is no further income tax liability
How is the return on a Treasury bill achieved?
Treasury bills are non-interest bearing instruments issued at a discount to par
How much interest will be paid on a cash deposit of £10k deposited for 6 months at 2.5%pa of the tax rate is 20%?
((£10k x 0.025)/2) * 0.8 = £100
