Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

IAD PAPER 2 > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

Open ended and closed ended funds

A

Collective investment schemes (CIS) which is a vehicle to aggregate many investors into a Poole of assets. Managed by a professional.

Good for less experienced investors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Assets within a CIS

A

Money market
Fixed income
Equities
Property.
Open ended funds are not traded on the stock exchange investors simply buy units from the distributor and then sell them back.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Exchange traded products (ETP)

A

These are another type of open ended fund but they are traded on the stock exchange. The share price usually reflects the underlying NAV of the assets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Closed ended funds

A

Another type of CIS however they are not taking any new investors into the fund and do not allow any redemptions into the fund. Also the units in the fund are then fixed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Benefits of a CIS

A

Liquidity
Access to large denomination securities
Diversification
Cost benefit
Managerial expertise

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Unit trusts

A

A type of Open ended funds, they are constituted as trusts because they have a trust deed and the trustees manage the investments as part of the trust. These are authorised by the FCA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Rules for unit trusts

A

Must have trust deed
Type of investments limited
Must meet requirements with it investments
Must limit one persons investment.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Open ended investment companies (OEIC)

A

Nearly same as unit trust just not a trust and is a legal company. Authorised cooperate directors must be in charge of these companies.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Exchange traded products

A

ETP are a passive fund with very low if not zero costs to enter. The difference form index funds is they are traded publically.
Physical ETP own their own assets synthetic don’t own the assets.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Benefits and limitations of passive ETPs

A

Benefits = low costs, minimal trading, real time pricing, very transparent,
Limitations = changes can be at elevated prices, cash drag, don’t employ risk, market risk, losses can be amplified

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Exchange traded commodities

A

They aim to track the performance of the underlying basket of commodities.
Can be bought within an isa.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Closed ended funds

A

Investment trusts are one example.
This is a public company that is run by a board of directors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Gearing

A

Closed ended funds can borrow against the value of the investment where open ended can’t as they are constantly changing in size.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Performance characteristics of investment trusts

A

Can provide better performance due to.
Freedom in investments
Does not have the same liquidity requirements meaning longer stratergies can be used.
Can gear up to to enhance returns.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Rela estate investment trusts

A

Can be more volatile than direct property purchase but does pay let stamp duty of 0.5%.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Advantages of real estate investment trusts

A

Page 377

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Offshore funds

A

This is an investment in a foreign country usually that has favourable tax regulations. This can be a benign fit to differing tax of avoiding all together.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Taxation of offshore funds

A

The tax depends on if they are reporting funds or non reporting funds
Reporting = this is treated as gross income so taxed at standard rates over allowances
Non reporting = same tax but cannot use allowances to offset some of the income.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Charges for CIS

A

This can be a % of size of fund, transaction costs of exit fees.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Pricing of open ended funds

A

Single pricing = this is a single price for the units/ shares in the funds which will apply to all transactions during the reporting period.
Duke pricing = this is where there is a bid price and offer price for the units in the fund.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Dilution levies on OEF

A

This is a charge usually for single priced funds to cover the dealing costs for managing the fund ie transaction costs so that the capital is delisted because of movements.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Forward and historic pricing

A

This is concerned with coming to the value of units using the NAV
Forward = this is when orders are taken using a price/ valuation at the next point, so investing blind.
Historic pricing = this is where you buy at the last valuation point.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Individual savings account (ISA)

A

This is a savings account with a tax rapper meaning income in free from tax, and no CGT. Up to 20k per year.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

JISA

A

9000 a year for anyone under 18

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Uk onshore and offshore life assurance company products

A

This includes certain pension and insurance products that can be used in financial planning.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

On shore investments

A

Single/ regular premium bonds, provided but life companies pay out should the life assured person die.
Wife profit bonds = offer payable benefit at some future maturity or on early policy holder death.
Distribution bonds = provides income by investing in bonds and then distributes this but not capital.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Tax treatment of onshore bonds

A

You can withdraw up to 5% of the amount paid into the bond tax free because the liability sits with the bond.
However certain event can trigger liabilities
Death
Assignment for money
Maturity
Partial surrender
Surrender

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Chargeable events acronyms

A

DAMPS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

The main benefits of offshore investment bond

A

What can be held - cash, equity , hedge funds
Benefits
Income and growth is free of income and CGT
Withdrawals up to 5% not tax
Can be gifted without crystallisation
Help with regular distributions and long term planning.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Portfolio bonds vs capital redemption bonds

A

Proftfolio bonds = wealthy investors, allow selection of investments, operate like a normal bond, no longer tax efficient so not really used
Capital redemption bonds = life company products without insurance element, used for investment only.

31
Q

Term assurance

A

7 main types of
Level
Increasing
Renewable
Convertible
Decreasing
Family income
Unitlinked

32
Q

Whole of life

A

4 main types of=
Nonprofit
With profit
Low cost whole of life
Unit linked.

33
Q

Endowment policy

A

5 main types =
Nonprofit
With profit
Low cost
Low start
Unitlinked

34
Q

Private equity

A

These funds typically invest in delisted companies and their are multiple types of funds
Bootstrap funding = this is the funding of not using external lending and keeping external debt minimal
Venture capital = investment in startups to help grow.
Leveraged buyouts = this is where a company is bought using borrowed funds the asset is then used a collateral for this debt. And its profits/ growth needs to cover the loan.
Mezzanine finance = this is debt that represents a claim on assets but nothing else.

35
Q

Equity co- investment

A

In certain circumstances a PE firm may also bring in a majority co investor alongside themselves on a purchase.

36
Q

Structure of PE firms

A

General partner
Limited partner
Diagram = page 404

37
Q

Enterprise investment schemes

A

EIS this is designed to help smaller higher risk business raise finance. By offering a variety of tax reliefs. But their are rules:
Perment establishment in uk
Unquoted
No arrangements to become listed
Cannot control another company unless that business qualifies.

38
Q

EIS reliefs

A

Income tax = up to 1m of an EIS at 30% of cost of the shares
CGT = profit on shares are not liable for CGT
Loss relief = losses can offset income
EIS shares qualify for Business relief meaning if held for 2 years or more then IHT free

39
Q

Seed enterprise investment schemes SEIS

A

This is to help early stage business grow and part of the governments effort to boost entrapaunership.
Conditions for this
Page 407

40
Q

Summary of tax reliefs for EIS and SEIS

A

EIS=
Income tax reliefs on £1m invested = 30% after three years, dividend EIS taxable, CGT exempt after three years, IHT free.
VCT=
200k investment max = 30% income relief and dividend exempt or 5 years , no CGT but are IHT liable
SEIS=
200k investment = 50% income after 3 years. Dividend is taxed, no CGT after three years, IHT free.

41
Q

Derivatives

A

These are financial contracts which the value is formulated form the underlying assets. They can be used for
Hedging
Arbitrage
Speculation
Antipating further cash flow
Asset collection

42
Q

Future and forward contracts

A

This is where a buyer agrees a price to pay for an asset before, either getting a good deal or loosing money because of the market.

43
Q

Distinct features of futures contracts

A

Exchange traded - this is where the trade on the exchange.
Standardised terms - the exchange specifies the quality of the underlying asset and the quantity in each contract. Only the price can be changed nothing else.

44
Q

Specialised derivative leagueage to understand

A

Long - describes the buy of a future
Short - seller of a future
Open - the initial trade. When opening a trade
Underlying asset - this is what drives the value of the future.
Basis - difference between cash price and underlying asset value
Delivery date
Close - when trade ends and is completed.

45
Q

Hedging using futures

A

This is where you minimise the risk of one position by hedging it against the opposite happening in a future.

46
Q

Characteristics of options

A

Options give buyers the right but not obligation to purchase or sell specific quantities of an asset at a pre-agreed price. Within a time period.

47
Q

Terminology for options

A

Call = right to buy at some point/ price
Put = sell at point/ price
At the money = an option where the price is where they have agreed to buy.
Out of money = when price is above the agreed price

48
Q

Option stratergies

A

Call options = taking out a long call option for an asset and then pays the premium of 10p for the right to buy. If it goes the wrong way the issuer of the trade gain the premium for nothing.
Put option = long out position where you pay a premium for the right to sell the underlying assets.

49
Q

Option premiums

A

The premium is made up of intrinsic value and time value
Intrinsic = difference between exercise and current share price
Time value = the longer the time period included in the option the higher to the value.

50
Q

Factors effecting option premiums

A

The underlying asset value
Exercise price
Time to maturity
Volatility of the asset

51
Q

Warrants

A

Warrant are negotiable securities issued by a company that confer a right on the holder to buy a certain of company shares at present price on a predetermined date.
Warrants are issues on a stand alone basis so the right to convert is traded separately.

52
Q

Covered warrants

A

These are warrants issued by a company other than the company the shares are for.

53
Q

Contracts for differences CFDS

A

This refers to derivatives that are cash settled.

54
Q

Hedge funds

A

These are usually unregulated although the fund managers will be regulated themselves. This just means they can invest in a larger amount of investments.
These funds usually have higher entry boundaries and return but also risk.

55
Q

Hedge fund characteristics

A

Page 425&426

56
Q

Hedge fund stratergies

A

Market neutral = take long and short positions
Equity = long and short taken on equities
Arbitrage = seeking to look at pricing inefficiency and anomalies by simultaneously selling and buying investments.
Rest page 427

57
Q

Risks of hedge funds

A

Gearing is used
Settlement
Currency
Dealing delays
Fraud
Lack of transparency
Liquidity

58
Q

Structured products

A

This is a term loosely used to cover a diverse and varied range of savings and investment products. That usually offer the below features
Income or growth but not both
Defined returns and risks
Links to external measures
Defined term

59
Q

Two main catoagories for structured products

A

Structured investments = pre packaged investment based on derivatives or single security
Structured deposits = cash backed products but can only be offered by banks which are able to accept deposits.

60
Q

Principle protection investments

A

This is where investors give up a proportion of the equities growth to secure the principle they invested. Would be used when they have a fixed expense but still want to invest in the meantime.

61
Q

Return enhanced investments

A

This is where if the investor accepts the full downside they can have a greater return then actual by using a leveraged upsitpde. This is used when the markets are flat of bullish. If the market goes up then the returns could be double but if it loss you pay a fee for the loss and loose principle.

62
Q

Other types of structured products

A

Income based investments
Strategic access investments
Hybrid investments dual index products
Constant proportion portfolio insurance

63
Q

Retirement planning

A

This is an important tool when providing investment advice.
Up to 25% of the pension can be taken tax free at the start the rest can be taken how the indervidual wishes.

64
Q

Occupational pension scheme

A

His is what is provided by an employer to an employee. Two main types
Defined benefit - this is a benefit paid out based on service to the company and salary
Mainly replaced by defined contributions.
Defined contributions = this isn’t about salary or service but a constant amount is paid into the pension so a pit builds and then this is used to pay the pension.

65
Q

Personal pension

A

This is a pension managed by an indervidual either a sipp or gpp

66
Q

Stakeholder pensions

A

This is a form of personal pension meeting certain requirements such as lower charges and accessible minimum contributions. Designed for lower income people.

67
Q

Self invested personal pensions

A

SIPPS this allows peripheral to invest themselves within their pension In what they choose.
Can contribute 3600 into each year as a min.

68
Q

Small self administered schemes (SSAS)

A

This is a company scheme where the members are usually all company directors.

69
Q

Annuities

A

This is where you convert the pension pot into a guaranteed income usually with a life assurance company. There are four main types
Lifetime = hands over all or part of the pension value for the remainder of the life of the investor.
Impaired life = they pay higher amounts if the person is suffering certain medical conditions
Enhanced = available to poor health people so payments are higher as chances are time will be less.
Differed annuities = pay lump sum or income at a future date.

70
Q

Annual allowance

A

Contribution into a person pension are usually considered net of the 20% tax you can get this back through a self assessment.
The annual allowance is 60k gross anything above this will be charged at a marginal rate.

71
Q

Tapered annual allowance

A

For people with income above 260kpa the allowance is reduced by £1 for every £2 above the limit. To a max reduction to 10k

72
Q

Money purchase annual allowance

A

The allowance is replace but the above when an indervidual start drawing their pension the MPAA is 10k

73
Q

Types of fees on a pension scheme

A

Annual
Admin fee
Contribution charge
Fund charge
Exit fee

IAD PAPER 2 (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions