Direct investments Flashcards
What are Treasury Bills
Short term loans to the government
Issued by government to finance daily cashflow
Issued weekly at auction
1,3 and 6 month maturities
No interest paid, issued below par and repaid at par on maturity
Government backed and highly liquid
Certificates of Deposit
Cash investment with a bank for a fixed period of time (can trade prior to maturity)
Max term 5 years
Fixed rate of interest or linked to LIBOR, paid at maturity
Interest rate depends on mkt rates and banks credit rating
Commercial Bills
Short-term loans to companies
Bought below PAR and returning PAR value
Maturities between 30 and 90 days
Unsecured
Reduced liquidity
Fixed interest securities (bonds) - pricing and trading
Traded on par value (face value)
Quoted at £100 nominal value
Prices quoted are mid-market which is the clean price (ignores accrued interest)
Fixed Interest Securities - accrued interest
Interest is paid twice yearly but accrued daily
Cum dividend - purchaser receives full 6 months interest (but pays accrued interest up to settlement date to seller)
Ex-dividend - seller receives 6 months interest (but price adjusted to reflect this)
Total price paid by purchase is the ‘dirty price’ = clean price +/- interest adjustment
Bond yields - interest yield (flat yield or running yield)
Coupon / Clean Price x 100
Bonds can trade above or below par
Doesn’t take account of gain/loss if held to maturity
If coupon above current interest rates and issuer is strong they trade above par
Bond yields - Redemption Yield
Step 1 - Calculate the interest/running yield if you don’t already have it - this is the gross interest/running yield which is required in calculating the gross redemption yield
If calculating the net redemption yield, the above figure will first need to be reduced by the tax position of the investor (ie yield x 0.55% for an additional rate payer)
Interest yield +/- gain/loss at maturity / number of years to maturity then divide by clean price and x 100
Redemption yield more accurate
If redemption is less than interest yield there will be a capital loss at maturity however this ignores tax
No CGT on gilts and most corporate bonds for individuals
Factors affected by bond prices
Required yield determines market price
When interest rates go up, bond prices fall as coupon is fixed the yield goes up
The lower the coupon the more volatile the bond
The longer the redemption period the more volatile the bond
Most volatile are low coupon long duration
Least volatile are short dates high coupon
Normal Yield Curve
Rising positive curve, higher yields for longer terms
Flat yield curve
Income similar for long and short term
If economic factors are stable and no radical changes to expected inflation or interest rates
Inverted/reverse yield curve
Yields on longer term bonds are less than short term bonds
Caused by supply and demand or when investors or when investors expect short term falls in interest rates and lower long term rates
Preference shares
Priority on company wind up
No voting rights
Fixed rate of dividend paid half yearly
Paid before dividends on ordinary shares but only if sufficient after-tax profits
Types of preference shares
Cumulative - where any missed dividends must be paid at a later date
Non-cumulative - any missed dividends don’t need to be paid at a later date
Participating - pays fixed rate of divs and allowed to participate in profits of company
Redeemable - at a set point in the future shares will be repurchased by issuer, sometimes at a set price
Convertible - can be converted to ordinary shares at a later date
Ordinary Shares - forms bulk of share capital of company
Last in line on company wind up
Entitled to profit after tax and pref share divs paid
Voting rights
Variable dividends
Entitled to residual value of assets after debts and pref shareholders
Bear the greatest risk
Types of ordinary shares
Non-voting
Deferred shares (don’t qualify for divs until divs reach pre-determined level
Alphabet shares - A,B,C each have different rights regarding divs, capital and voting rights
