Chapter 5: Other Markets and Investments

Question 1

what do cash deposits comprise of?

Answer 1

accounts held with banks or other savings institutions, widely held by a variety of depositors inc. govts, retail investors and companies

Question 2

what are the main characteristics of cash deposit accounts?

Answer 2

the return on these accounts simply comprises interest income with no potential for capital growth, the amount of capital invested is repaid in full at the end of the investment term or when it is withdrawn

Question 3

what are the different types of cash deposit accounts?

Answer 3

some are known as instant access accounts where the money can be withdrawn at any time, other accounts are for a fixed term, some require notice before monies can be withdrawn

Question 4

what are money markets?

Answer 4

the wholesale or institutional markets for cash

Question 5

what are money markets characterised by?

Answer 5

the issue, trading and redemption of short-dated negotiable securities with usually a maturity of less than a year and 3 months or less being the most typical

Question 6

what is the difference between money markets and capital markets?

Answer 6

in contrast to the short-term nature of money markets, capital markets are long-term providers of finance for companies and individuals through investment in either bonds or shares

Question 7

what are the main types of money market instruments?

Answer 7

treasury bills. certificates of deposit, commercial paper

Question 8

what are treasury bills?

Answer 8

issued weekly by the debt management office on behalf of HM treasury, money is used for the govt’s short-term borrowing needs, non interest bearing, issued at a discount to par (price of less than £100 p/ £100 nominal)

Question 9

what are certificates of deposit?

Answer 9

issued by banks in return for deposited money and are tradeable on the money markets

Question 10

what is commercial paper?

Answer 10

corporate equivalent to a treasury bill, issued by large companies to meet their short-term borrowing needs

Question 11

what are the opportunities for direct investment in residential property?

Answer 11

second homes, buy-to-let schemes, holiday homes

Question 12

what are tenancies?

Answer 12

typically short renewable leases

Question 13

who is responsible for repairs in a residential property?

Answer 13

the landlord, drawback

Question 14

what are returns linked to in the residential property space?

Answer 14

increase in house prices, largely

Question 15

what is limited in terms of investment into commercial property?

Answer 15

the size of the investment required means direct investment into commercial property is limited to property companies, institutional investors and high net-worth individuals

Question 16

what is the length of tenancies in commercial properties?

Answer 16

long-term, with period usually in excess of a decade

Question 17

who is liable for repairs in a commercial property?

Answer 17

the tenant is usually responsible

Question 18

where are most of the ROIs found in commercial property

Answer 18

significantly composed from rental income

Question 19

what does the FX market refer to?

Answer 19

the trading of one currency for another, largest traded market in the world

Question 20

where is the worlds biggest FX market and what are some other global centres?

Answer 20

London, other major centres include Hong Kong, Singapore and Japan

Question 21

how are currencies on the FX market traded?

Answer 21

always in pairs e.g., USD/JPY (US dollar is being traded against the Japanese Yen), the base currency always comes first and is represented as 1 and then the currency it’s being traded with comes second (this is the counter/quote currency) and is expressed in the nominal value that 1 unit of the base currency is worth

Question 22

what sort of market is the FX market and what does this means

Answer 22

it’s an OTC market which means that brokers and dealers deal with each other directly

Question 23

who are the main participants of the FX market and what do they try to do?

Answer 23

central and international banks, they often try to control money supply, interest rates and inflation through the FX market

Question 24

what is a spot transaction?

Answer 24

rate quoted transactions that take place immediately, the trade is often actually settled two days after the transaction

Question 25

what are forward transactions?

Answer 25

trades that are settled for a future date between brokers and dealers. this trade will take place at the agreed exchange rate at the time, regardless of the market rate when the trade is executed

Question 26

what are futures FX trades?

Answer 26

a version of a forward transaction that have a standard size and maturity date, these are typically three months long

Question 27

what are FX swaps?

Answer 27

most common FX trade, two parties exchange currencies for a fixed period and reverse the trade at a later date

Question 28

what are some of the advantages to investing in cash deposits?

Answer 28

ease adn speed of turning the investment into cash to meet spending needs (liquidity), can earn interest as they can form a savings vehicle, relatively safe

Question 29

what are some of the drawbacks to investing in cash deposit accounts?

Answer 29

deposit-taking institutions vary in creditworthiness (they may default, and this risk needs to be taken into account), inflation reduces the real return that is being earned (may mean that the real return after tax is negative), returns from cash-backed accounts may vary, there is a currency risk is funds are invested into offshore accounts or in a different country

Question 30

what is cryptocurrency?

Answer 30

type of digital currency or asset that can be traded, stored and transferred electronically. represented by a digital record and not issued by a central bank or a similar institution

Question 31

what are the three main types of crypto assets?

Answer 31

exchange tokens (cryptocurrencies used as a means of exchange for goods and services), security tokens (features similar to general investments such as asset ownership), utility tokens (gives access to services and products)

Question 32

what is the view on cryptocurrencies by the BoE and FMCBGs?

Answer 32

view that that whilst they can be used as a means of exchange, they are not currently considered to be a currency or money, seen as too volatile to be a good store of value and are not widely accepted as a means of exchange or used as a unit of account

Question 33

how are money market instruments settled?

Answer 33

typically, through CREST. (also used to settle trades in stocks and bonds in the UK), settled on the day or on the next business day

Question 34

what are short-term money market funds?

Answer 34

money market funds that can have a constant or fluctuating NAV (net asset value)

Question 35

what are money market funds?

Answer 35

these are funds that must have a fluctuating NAV

Question 36

what are the advantages of direct investment in property?

Answer 36

positive real long-term returns allied to low volatility, reliable stream of income through rental, can provide diversification benefits within a portfolio.

Question 37

what are some of the drawbacks to direct property investment?

Answer 37

can be subject to prolonged downturns, lack of liquidity, high maintenance costs, high transaction costs on transfer, risk of having commercial property and not having a tenant

Question 38

how often are interest rates quoted and how does this affect forward FX rates?

Answer 38

quoted annually so when calculating the forward FX rate, need to divide the annual interest rate by 4 to get the quarterly rate for the short term. e.g., uk rate is 0.50 which divided by 4= 0.125%

Question 39

how is the forward exchange rate calculated?

Answer 39

Forward rate= spot rate x (1+quote currency short-term rate/ 1+base currency short-term rate)

Question 40

how do interest rates affect the forward rate?

Answer 40

if the interest rate is higher in a country, then the forward rate will be higher, if the interest rate is lower, then the forward rate will be lower (positive correlation)

Question 41

What is the maximum amount of compensation per person that would be payable by the Financial Services Compensation Scheme (FSCS) in the event of the failure of a bank?

Answer 41

The FSCS provides protection for the first £85,000 of deposits per person with an authorised institution.

Question 42

Economic theory holds that money should serve which three functions?

Answer 42

a store of value, a medium of exchnage with which to make payments, a unit of account to measure the value of any particular item that is for sale

Question 43

How is the return on a Treasury bill achieved?

Answer 43

the investors return is seen in the difference between the discount to par that they pay, and the nominal value gained at the maturity date of the treasury bill