Chapter 5: Other Financial Assets

Question 1

What are cash deposits and their main characteristics?

Answer 1

Wealth in cash which will be deposited with a bank or other savings institution to earn interest.

The return comprises interest income with no potential for capital growth.

The amount invested is repaid in full at the end of the investment term or when withdrawn.

Question 2

Types of cash deposits:

Answer 2

Instant access - money can be withdrawn at any time

Fixed term - year or more

Question 3

Advantages of investing in cash:

Answer 3

1. Liquidity - ease and speed with which an investment can be turned into cash to meet spending needs.
2. Savings vehicle - interest
3. Safe investment

Question 4

Disadvantages of investing in cash:

Answer 4

1. Inflation
2. Interest rates
3. Currency risk

Question 5

Cryptocurrencies

Answer 5

Type of digital currency or asset that can be traded, stored and transferred electronically. They are a virtual currency that is represented by a digital record, is not issued by a central bank or similar institution, is not legally established and which can be used as an alternative to money.

Question 6

FCA 3 main types of crypto assets

Answer 6

Exchange tokens - Bitcoin etc

Security tokens

Utility tokens

Question 7

Fiat money

Answer 7

Money that is no longer convertible into gold or any other asset.

Question 8

3 functions of money

Answer 8

1. A Store of value
2. A medium exchange with which to make payments
3. A unit of account with which to measure the value of any particular item that is for sale

Question 9

What are Money markets

Answer 9

The wholesale or institutional markets for cash and are characterised by the issue, trading and redemption of short-dated negotiable securities. These usually have a maturity of up to one year, though three months or less is more typical. Capital markets are the long term providers for finance companies through investments in either bonds or shares.

Question 10

Money market instruments explained

Answer 10

Most instruments are issued in bearer form and at a discount to their face value to save on the administration associated with registration and the payment of interest. Also usual to issue on electronic form now too.

Direct investment in money market instruments is often subject to a relatively high minimum subscription and therefore tends to be more suitable for institutional investors.

They are unsuitable for anything other than the short term as they underperform most other asset types over the medium to long term.

Question 11

Types of uk money market instruments:

Answer 11

1. Treasury bills - issued weekly by debt management office (DMO). Money is used for the governments short term borrowing needs.
2. Certificate of deposits (CDs) - issued by banks in return for deposited money and are tradable on money markets.
3. Commercial paper (CP) - corporate equivalent of a treasury bill. Issued by large companies to meet their short term borrowing needs.

Question 12

IA and FCA money market sectors

Answer 12

1. Short term money market funds - have a constant or fluctuating NAV
2. Money market funds - must have fluctuating NAV

Question 13

Page 100 for property

Answer 13

Read it broski

Question 14

Currency quotes

Answer 14

When currencies are quoted the first currency is the BASE currency and the second is the COUNTER or QUOTE currency. Base currency is always equal to one unit or that currency.

FX market is OTC. Main participants are large international banks.

Question 15

FX transactions:

Answer 15

1. Spot transaction - spot rate is the rate quoted by a bank for the exchange of one currency for another with immediate effect.
2. Forward transaction - money does not actually change hands until some agreed future date.
3. Future - foreign currency futures are a standardised version of forward transactions
4. Swap

Settlement is made through CLS bank.