Financial Securities Flashcards
What should you think about on characteristics of assets/investments?
SYSTEM-T
Security (risk)
Yield (nom or real, running yield, exp ret, compared to other assets)
Spread (diversification and vol)
Term
Exchange rate/expenses/econ conditions/expertise required
Marketability
Tax
General reasons for being in money market (holding cash)
POURS
Protect monetary value Opportunities to take advantage of Uncertain outgo Recent inflow of cash Short term commitments
Economic situations where cash (money markets) are attractive
GRID
Greneral economic uncertainty
Recession
Interest rates rising
Depreciation of domestic currency
Theories of yield curve
LIME
Liquidity pref
Infln risk prem
Market segmentation
Expectations
Characterisitics of Prime property
CALL ST
Comparables Age/condition/use/flexibility Location Lease Size Tenant
3 main difficulties of overseas (emerging markets too) investment
MTV
Mis-match of domestic liabilities
Tax
Volatility of currency
Lots of overseas investment problems..
CATERPILLAR
Custodians needed Additional admin Time delays Expenses incurred/expertise required Regulation poorer Political problems Information poorer Language difficulties Liquidity poorer Accounting differences Restrictions on ownership of assets/repatriation problems
Reasons for O/S investment and why risk and diversification is higher?
Correlation is less so reduced risk High growth in emerging market Inefficiencies in emerging market Liability matching Inefficiencies taken advantage of Sentiment changes, so foreign investors repatriate a lot of funds at once, volatile!
Diversification increase Risk higher Industrialisation in emerging economy Expected returns increase Different industries to domestic
Ways of getting exposure to overseas markets
Direct Multinationals based in home market (indirect) Exporters Collective investment schemes derivatives on overseas assets
What are the characteristics of freehold
Capital gains recieved Income from leaseholder for ground rent Refurbishment and development rights Occupation possible or leasing Perpetual ownership of property and site
Characteristics of leasehold
Rents proprty for fixed period, no ownership
Zero capital value at end of lease
Terms of lease (rent, rent reviews)
Sub lease possible
Sale of leaseholder less marketable than freehold
What ways can you get property exposure?
Direct investment
Pooled investments (OEIC and inv trusts)
Shares of property company
Advantages of direct property investments?
Diversification
Volatility decrease due to less valuations
Control of your investment
Exposure to less risk than undeveloped land
Sales not forced
Advantages of shares in developer or indirect property investments
Management expertise Divisibility Marketability Diversification is instant Market values readily available Size is larger than possible in direct investments
What is a warrant?
An option on the issuers shares, with an expiration date
What other factors influence the choice of property investment type?
Tax treatment
Gearing, due to secure income stream from commercial property
NAV discount on property shares (cheap exposure)
Which collective investment vehicle is closed ended, which are open ended?
Closed = Investment trust (like shares) Open = Unit trust, OEIC
How do you invest in closed ended scheme?
Invest at the start
Buy shares from willing seller
How do you invest in open ended scheme?
Manager creates/cancels units for you
Which trust is a public company?
Investment trust (like shares)
Which trust uses trust law?
Unit trust
Which investment vehicle can raise capital through loans and issuing equity?
Investment trust (like company)
Which CInvVehicle(s) has trustees, who can they be?
Unit trust/OEIC, banks or insurance companies
Which CIV’s are governed by company law?
Investment trusts, OEIC’s
Disadvantages of CIV’s?
Control loss, no control of individual investments chosen by managers
Management charges incurred
Tax disadvantages such as withholding tax can’t be reclaimed
Advantages of CIV’s
Small investors, has more advantages than big
Costs of direct investment avoided
Holdings divisible
Expertise aquired instantly
Marketability can be increased, may be less than underlying assets though
e
Diversification
Tax advantages
Tracks return on specific index
Differences between Inv trusts and Unit trusts
Volatility more in closed ended, so higher expected return
NAV discount in Closed ended
Range of assets larger in Closed ended
Charges from management higher in Open ended
Taxed differently
Uncertain try level of NAV per shares in closed ended, esp if unquoted stocks invested in
Marketability more in open ended, closed ended less marketable than underlying
Volatile shares in closed ended dure to size of discount to NAV changing
Gearing in closed ended makes more volatile, not open ended
Why invest in LISTED stocks?
Security
Market value has meaning
Limitations to your investments (pens scheme)
Which 3 ways would you categorize shares?
Size of company (market cap)
Expected profit growth
Industry (sector)
Why have industry analysts, why not specialise in everything?
Concentrate on specific companies
Practicality
Correlated investment performance
Explain inflation risk premium theory
Future inflation unknown
Higher yield required for unknown future inflation at longer durations
Upward sloping yield curve
Market segmentation theory explanation
Yields effected by supply and demand of investors with liabilties of those terms
Banks are short term and compare yields to s.t.interest rates
Insurance are long term, compare to possible inflation, so move independantly of banks
Explain expectations theory
yield curve shape determined by economic factors
factors drive expected future short term interest rates
expectations change required yields
Explain Liq Pref theory in 3 points
Liquid assets prefered to illiquid
Long dated are less liquid, need higher return
So upward sloped yield curve
When would investors prefer conventional bonds than IL bonds?
If expected inflation is lower than ny-rfry then:
Buy conventional now
Inflation decreases, so Conv bond price increases, IL bond price decreases, yields get closer
Sell my conventional bond at a higher price
What effects the yield margin between govt bonds and corporate?
Security
Marketability
Compare bonds that are equivalent!
What is the nominal yield formula?
n=rfry+exp inflan+ inflan rp
What is inflation risk premium?
Premium for investors with real liabilities for future inflation uncertainty
Describe money markets and market makers
Repos and treasury bills are used for CB operations
Iinterest rates, central banks can set them using operations
Physical, it’s not a phyiscal market
Liquidity, central bank can provide it
Other financial/non-financial institutions lend/borrow on this market when excess or shortage of short term cash
What does Money market instrument mean?
Short term cash deposits
Why have industry analysts, in terms of practicality
Factors effecting 1 company effect others in industry
Specialisation appropriate, can’t specialise to all areas
Grouping equities gives structure to decision making
Source of information for companies in same sector will be the same if in same sector
In terms of correlation, why have industry analysts?
Correlation within secotr higher than non-sector
Resources - Sectors use same resources like labour, land, raw materials
Markets - supply same markets
Structure - Financial structure same, so similar effect of interest rates
Do System T on Property, add other things
Security - depends on quality of tenants, risk of void periods too
Yield - running yield is rental yield, varies with type of building, will be between conv bond yields and equities
Spread - diversified from other markets, less volatile in some ways than market due to less valuation periods
Expected return higher than IL bonds as less marketable/secure
Marketability is very low
Tax is various including stamp duty, CGT, income tax
Other things are Hedged against inflation, upward only rents, uniqueness, obsolescence if old
