Chapter 5 - other markets and investments Flashcards
+What are cash depositors and the main characteristics? advantages and disadvantages
Cash depositors are accounts held with banks and other saving institutions.
Main characteristics: return is interest, full amount can be withdrawn
Advantages - fast liquidity, relatively safe, saving vehicle for interest
Disadvantages - Risk if the bank defaults, inflation could reduce return, currency risk
After 2016, how much do tax payers now pay
Basic tax payers - up to £1000
High tax payers - up to £500
What is the compensation scheme
The financial service compensation scheme protects individuals up to £85,000
what is cryptocurrency and the three main kinds of cyrtoassets?
Digital currency/asset that can be traded, stored or transferred electronically
Three main kinds:
- Exchange token - bitcoin
- Security token
- Utility token
what is a fiat currency
Government-issued money and has value because the government maintains it
the differences of fiat currency and cryptocurrency?
Fiat = physical forms crypto = digital
Fiat= issued by central authority crypto = decentralised
fiat = transaction takes longer crypto = faster
the three main functions of money
- store of value
- medium of exchange to make a payment
- unit of account to measure value of item on sale
what is a money market? and advantages and disadvantages
it is used for short-term borrowing and lending. Has a maturity up to one year.
Advantages - low-risk, keeps nominal value of investment, no market risk
disadvantages - only suitable for short-term, subject to risk of banks
what are the instruments within a money market
Treasury bills - issued weekly by DMO for the government’s short-term borrowing. There is 0 interest and is issued at discounted rate.
Certificate of deposit - issued by banks in return for deposited money
Commercial paper - issued by large companies to meet their short-term borrowing needs
what are the two money market sectors stated by the investment association?
money market funds - has a mix of short-term and long-term
short-term money market funds - focuses specifically on short-term investments
What are the features of investing in property?
- unique in terms of location
- valuation is subjective
- complex legal considerations
- relatively illiquid
- no diversification
what is residential property and commercial property and the differences?
residential - where people live
commercial - used for business purposes
differences:
R = short-term leasing C= long-term contracts, up to 10 years
R = Landlord responsible c= tenant responsible
advantages and disadvantages of investing in property
advantages:
- provides reliable income
- long term returns with low volatility
- property appreciates
disadvantages
- illiquid
- no diversification
- high maintenance costs
- transaction costs
what is a mutual fund?
way for investors to invest in property without directly buying the property. Invest in a real estate investment trust or real-estate companies.
how are currency pairs traded?
The first currency is the base currency, always equal to 1, the second is the quote currency/counter
what does it mean if the exchange rate goes up?
The base currency is rising to the other currency
what are the types of transactions/instruments used in fx markets
Spot - buying/selling a currency which is settled immediately, usually within 2 days
Forward - agreement to buy/sell the currency at set price on specific date in future
Future - contract to buy/sell at a fixed price at a set price or later date
Swap - when two people agree to trade currencies at set time, then trade back after
how are settlements made in fx?
Settlements are made by the CLS or the worldwide international banking system. it settles through a system called “Payment vs payment”
what is a foreign exchange contract?
agreement between two parties to either buy or sell foreign currency at a fixed exchange rate for future dates
how to calculate forward rate?
spot rate x (1 + quote currency short-term rate/ 1 + base currency short-term rate)
remember - the currency needs to be divided by 4 to work out quarterly.
