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AF4 > Direct Investments > Flashcards

Direct Investments Flashcards

1
Q

Cash - basic features

A
  • no capital growth
  • £85,000 FSCS limit per person per institution
  • temporary high balance limit of £1mn for inheritance, sale of house etc

risks:
- default
- inflation
- interest rate
- Exchange rate (FX accounts)

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2
Q

Cash - T Bills features

A
  • minimum investment £500k
  • 90 day holding
  • issues at discount to redemption value
  • issues as £100 bill
  • issues by DMO
  • risk free / government backed
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3
Q

Cash - certificates of deposit features

A
  • bank to bank lending
  • £500k minimum
  • 30 days to 5 years
  • risk is higher as not government backed so coupons are higher
  • rates based on libor
  • offer at discount to PAR (price at redemption)
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4
Q

Cash - commercial bills features

A
  • short term lending to companies
  • discount to par
  • £500k minimum
  • higher risk than T bills
  • less liquid than T Bills
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5
Q

Cash - peer to peer lending

A
  • can be used against PSA

- since 6/4/16 has been covered by FSCS but only in certain circumstances and if done on an advised basis

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6
Q

Fixed interest - gilts - characteristics

A
  • coupon (interest) paid every 6 months e.g. 6% = 3% per 6 months
  • £100 denominations
  • issues by DMO at discount to PAR
  • then bought/sold on secondary market
  • before redemption date
  • Interest is taxable
  • can be used against PSA
  • exempt from CGT if held directly
  • can’t claim losses
  • same for corporate bonds

Clean price = market value not including accrued interest

Dirty price = market price + accrued interest

C&D prices used to split CGT and Income

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7
Q

F.I. Interest/running/income/flat yield

A
  • coupon /clean price x 100

- good to show income but takes no account for gains or losses

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8
Q

F.I. Gross Redemption yield

A
  • first calculate interest yield
  • (then profit or loss at redemption /number or years to redemption) / clean (market) price

E.g. coupon is 5% and clean price is £107.50

Interest yield = 4.65%

Redemption yield = (if 5 years to redemption) = -(£7.50 /5) / £107.50. X 100 = -1.4%

Therefore Gross redemption yield = 4.65% - 1.4% = 3.25%

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9
Q

F.I. Risks

A
  • interest rate
  • liquidity
  • reinvestment
  • inflation risk
  • currency
  • default
  • systematic / market risk
  • non systematic (specific ) risks
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10
Q

F.I. Volatility of bonds

A

Most volatile = undated stocks

For Dated stocks the most volatile are:

  • Lower coupon
  • longer period to redemption

Most of return comes from a bond in the later stages so is more volatile if longer dates as exposed to interest rate changes for longer

The holder of a bond with a higher coupon will receive return on a bond more quickly than those of a low coupon bond.

The holder of a shorter dated bond will receive a return on the bond earlier than the holder of a longer dated bond. Also it is exposed to Interest rate movements for a shorter time

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11
Q

What is meant by Duration / Macauley’s duration of bond? (5)

A

Duration

  • period of time
  • in years
  • taking account of all coupons and capital
  • to repay the initial outlay

-used to measure sensitivity of FI investment to changes in interest rates

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12
Q

F.I. Modified Duration

A

(Macaulay’s) duration / (1+GRY)

To show effect of 1% change in interest rates on bond =

Modified duration x 0.01 x clean price

  • shows change in bond value in £’s
  • if interest rate increases then value will be a negative figure
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13
Q

Bond yields - what does a flat yield curve show? (3)

A
  • longer dates bonds have same interest rates as shorter dated
  • interest rates are not expected to rise
  • inflation is expected to remain the same
  • low economic growth expected
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14
Q

Explain 5 risks of peer to peer lending (5)

A
  • no FSCS protection
  • lack of liquidity
  • default / credit risk
  • lack of transparency
  • counterparts/ platform solvency risk
  • new industry so no experience of how it may withstand an economic downturn
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15
Q

Main differences between the listing requirements of AIM and main market (6)

A
  • no minimum capitalisation requirement for AIM
  • no minimum amount of shares in public hands for AIM / 25% for main market
  • No trading history required for AIM / main market 3 years trading history required
  • broader range of accounting standards applicable
  • AIM has a more relaxed reporting timeframe
  • AIM is higher risk
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16
Q

3 advantages and 3 disadvantages of investing in art (6)

A

Advantages:

  • pride in possession
  • uncorrelated to other assets
  • diversification
  • large gains possible

Disadvantages:

  • don’t unusually generate income
  • storage/ insurance costs
  • value dependant on supply and demand
  • demand driven by personal tastes
  • uncertainty of if art is genuine / fraud risk
  • specialist knowledge often needed
17
Q

Bond yields - what does a normal yield curve show?

A
  • uncertainty over future interest rates
  • interest rates expected to increase
  • inflation expected to increase
  • think in terms of mortgage interest rates
18
Q

Bond yields - what does an inverse / reverse yield curve show

A
  • short term interest rates likely to be high
  • longer term interest rates are expected to be lower
  • inflation is expected to be lower in future
19
Q

Factors effecting price of equities (6)

A
  • supply/demand
  • expected dividends
  • interest rate changes (IR goes up then prices go down)
  • market sentiment
  • profit expectations
  • mergers and acquisitions (company buying will see a short term price fall, company selling will see a short term price increase)
  • systematic risk
  • non systematic risk
  • systemic risk
20
Q

Factors effecting price of equities (6)

A
  • supply/demand
  • expected dividends
  • interest rate changes (IR goes up then prices go down)
  • market sentiment
  • profit expectations
  • mergers and acquisitions (company buying will see a short term price fall, company selling will see a short term price increase)
  • systematic risk
  • non systematic risk
  • systemic risk
21
Q

Structure of preference shares

A
  • fixed dividend paid half yearly
  • priority to dividends over ordinary shares
  • no voting rights
  • tank ahead of ordinary shares in liquidation

Types of PS:

  • cumulative
  • non cumulative
  • participating
  • redeemable
  • convertible
22
Q

Ordinary shares / A shares / deferred shares

A
  • bulk of company share
  • right to profits after preference shareholders
  • vote at AGM
  • last in line for assets on liquidation
    - after all debts paid
    - and other shareholder paid

A shares = as above but non voting

Deferred shares = no dividend until XYZ happens

23
Q

Why would an investor invest in several bonds with different times to redemption? 6)

A
  • reduces reinvestment risk
  • reduces interest rate risk
  • reduces default risk
  • to meet future liabilities
  • provide regular cash flow / spread out coupons
  • diversification
24
Q

Why may a bond be trading under par? (4)

A
  • company may be struggling
  • may default in coupon
  • may not pay redemption value
  • in a sector which is struggling/out Of favour
25
Q

What is ‘accused interest ’ of a bond? (3)

A
  • amount of interest earned
  • since last coupon date
  • it is added to purchase price of the bond
26
Q

Why buy shares in a company rather than a bond and what are the additional risks? (9)

A

Why:

  • higher yield
  • potential for capital gain
  • potential for increasing dividend
  • open ended timeframe / avoids reinvestment risk
  • diversification
  • potential tax advantages

Risk factors:

  • dividend not as secure
  • share price could fall more than bond
  • share price more volatile
  • Lower priority on liquidation
27
Q

Main differences in listing requirements between AIM and the main market and explain the risk implications (6)

A
  • no minimum capitalisation with AIM
  • no minimum percentage of shares in public hands / 25% with main market
  • AIM no trading history required / 3 years with main market
  • AiM has broader range of accounting standards / main market IFRS
  • AIM has more relaxed reporting timeframe
  • aim higher risk
28
Q

Likely impact on bond in the event of a 1% increase in interest rates (5)

A
  • bond prices will fall
  • roughly 1% per year of duration
  • coupons stay the same
  • yields will go up
  • bonds with shorter duration will fall less
  • bonds with longer duration will fall more
29
Q

5 benefits of Investing in commercial property (5)

A
  • diversification
  • uncorrelated
  • can use gearing
  • regular income from rents
  • potential for real growth on income and capital
  • possible to offset I come against borrowing costs for tax purposes
30
Q

3 risks of commercial property in times of recession

A
  • increases risk of void periods
  • increases liquidity risk
  • harder to attract tenants at a competitive rent
31
Q

Main features of preference shares compared to ordinary shares 3

A
  • fixes divs
  • higher priority of payment of divs
  • higher priority on wind up
  • no voting rights

AF4 (33 decks)

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