Chapter 5: Other Markets and Investments

Question 1

What are Cash Deposits?

Answer 1

Comprise accounts held with banks or other savings institutions to earn interest. CD are held by a wide variety of depositors.

Question 2

Main characteristics of Cash Deposits?

Answer 2

1. the return comprises interest income with no potential for capital growth.
2. the capital (amount invested) is repaid in full at the end of the investment term or when withdrawn.

Question 3

What are instant and fixed-term access deposit accounts?

Answer 3

An “instant access” account allows the money to be withdrawn at any time.

A “fixed term” account requires a notice for the money to be withdrawn and is usually fixed for 12 months or more.

Question 4

What is the interest rate paid on cash deposits?

Answer 4

IR rate paid on deposits will depend on the amount of money deposited and the time for which the money is tied up.

Usually, larger cash deposits will earn a better rate.

An IR received is liable to income tax but is now paid gross to investors.

Question 5

What are the advantages of investing in cash?

Answer 5

1. Liquidity (ease and speed with which an investment can be turned into cash)
2. Savings vehicle (interest return that can be earned on them)
3. Safety as not exposed to market volatility as opposed to other types of assets

Question 6

What are the disadvantages of investing in cash?

Answer 6

1. Deposit-taking institutions are of varying creditworthiness
2. Inflation reduces the real return that is being earned
3. Interest rates vary which means that returns will also vary
4. Currency risk
5. Different regulatory regimes

Question 7

What are cryptocurrencies?

Answer 7

A type of digital currency or asset that can be traded, stored and transferred electronically.

They are not issued by a central bank or similar institution as not legally established currency.

Question 8

What are the 3 main kinds of cryptoassets?

Answer 8

1. Exchange tokens (i.e. Bitcoin)
2. Security tokens (i.e. features similar to general investments)
3. Utility tokens (gives access to products and services)

Question 9

What is fiat currency?

Answer 9

A fiat currency is a national currency that is not pegged to the price of a commodity such as gold or silver. The value of fiat money is largely based on the public’s faith in the currency’s issuer, which is normally that country’s government or central bank.

Question 10

What functions does money serve?

Answer 10

1. Store of value
2. Medium of exchange with which to make payments
3. Unit of account with which to measure value of any particular item for sale

Question 11

What is a capital market instrument?

Answer 11

Capital markets are the long-term providers of finance for companies through investments either in bonds or shares.

Question 12

What is a money market instrument?

Answer 12

The money markets are the wholesale or institutional markets.

Characterised by the issue, trading and redemption of short-dated negotiable securities.

They usually have a maturity of up to 1 year - typically 3 months or less.

Tend to be more suitable for institutional investors due to high minimum subscription.

Question 13

What are the advantages and disadvantages of money market instruments?

Answer 13

Advantages:
- a low-risk way to generate income/ capital return
- preserve the nominal value of the amount invested

Disadvantages:
- only suitable for the short term as they underperform most other asset types on medium/ long term
- on medium/long term, cash deposits returns are barely positive after tax and inflation have been taken into account

Question 14

What are treasury bills?

Answer 14

• Issued weekly by DMO.
• Money used for the government’s short-term borrowing needs
• Non-interest-bearing instruments
• Normally issued at a discount to par instead of interest being paid out

Question 15

What is commercial paper?

Answer 15

• Corporate equivalent of a Treasury bill.
• Issued by large companies to meet their short-term borrowing needs.
• A company’s ability to issue CP is typically agreed with banks in advance.

Question 16

What are the Certificates of deposit?

Answer 16

Issued by banks in return for deposited money and are tradeable on the money markets. Interest can be at a fixed or variable rate. Most sterling CDs are held by banks, building societies and other money market participants.

Question 17

What are money market funds?

Answer 17

Money market funds invest in a combination of short-term debt investments issued by governments and companies. These are lower-risk investments and their purpose is to give a return that’s slightly higher than what you can get from cash at the bank. They also have a fluctuating net asset value.