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3. Exam 3 > Financial Securities > Flashcards

Financial Securities Flashcards

1
Q

What should you think about on characteristics of assets/investments?

A

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

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2
Q

General reasons for being in money market (holding cash)

A

POURS

Protect monetary value
Opportunities to take advantage of
Uncertain outgo
Recent inflow of cash
Short term commitments
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3
Q

Economic situations where cash (money markets) are attractive

A

GRID

Greneral economic uncertainty
Recession
Interest rates rising
Depreciation of domestic currency

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4
Q

Theories of yield curve

A

LIME

Liquidity pref
Infln risk prem
Market segmentation
Expectations

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5
Q

Characterisitics of Prime property

A

CALL ST

Comparables
Age/condition/use/flexibility
Location
Lease
Size
Tenant
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6
Q

3 main difficulties of overseas (emerging markets too) investment

A

MTV

Mis-match of domestic liabilities
Tax
Volatility of currency

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7
Q

Lots of overseas investment problems..

A

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
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8
Q

Reasons for O/S investment and why risk and diversification is higher?

A 
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
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9
Q

Ways of getting exposure to overseas markets

A 
Direct
Multinationals based in home market (indirect)
Exporters
Collective investment schemes
derivatives on overseas assets
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10
Q

What are the characteristics of freehold

A 
Capital gains recieved
Income from leaseholder for ground rent
Refurbishment and development rights
Occupation possible or leasing
Perpetual ownership of property and site
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11
Q

Characteristics of leasehold

A

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

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12
Q

What ways can you get property exposure?

A

Direct investment
Pooled investments (OEIC and inv trusts)
Shares of property company

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13
Q

Advantages of direct property investments?

A

Diversification
Volatility decrease due to less valuations
Control of your investment
Exposure to less risk than undeveloped land
Sales not forced

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14
Q

Advantages of shares in developer or indirect property investments

A 
Management expertise
Divisibility 
Marketability
Diversification is instant
Market values readily available
Size is larger than possible in direct investments
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15
Q

What is a warrant?

A

An option on the issuers shares, with an expiration date

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16
Q

What other factors influence the choice of property investment type?

A

Tax treatment
Gearing, due to secure income stream from commercial property
NAV discount on property shares (cheap exposure)

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17
Q

Which collective investment vehicle is closed ended, which are open ended?

A 
Closed = Investment trust (like shares)
Open = Unit trust, OEIC
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18
Q

How do you invest in closed ended scheme?

A

Invest at the start

Buy shares from willing seller

19
Q

How do you invest in open ended scheme?

A

Manager creates/cancels units for you

20
Q

Which trust is a public company?

A

Investment trust (like shares)

21
Q

Which trust uses trust law?

A

Unit trust

22
Q

Which investment vehicle can raise capital through loans and issuing equity?

A

Investment trust (like company)

23
Q

Which CInvVehicle(s) has trustees, who can they be?

A

Unit trust/OEIC, banks or insurance companies

24
Q

Which CIV’s are governed by company law?

A

Investment trusts, OEIC’s

25
Q

Disadvantages of CIV’s?

A

Control loss, no control of individual investments chosen by managers
Management charges incurred
Tax disadvantages such as withholding tax can’t be reclaimed

26
Q

Advantages of CIV’s

A

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

27
Q

Differences between Inv trusts and Unit trusts

A

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

28
Q

Why invest in LISTED stocks?

A

Security
Market value has meaning
Limitations to your investments (pens scheme)

29
Q

Which 3 ways would you categorize shares?

A

Size of company (market cap)
Expected profit growth
Industry (sector)

30
Q

Why have industry analysts, why not specialise in everything?

A

Concentrate on specific companies
Practicality
Correlated investment performance

31
Q

Explain inflation risk premium theory

A

Future inflation unknown
Higher yield required for unknown future inflation at longer durations
Upward sloping yield curve

32
Q

Market segmentation theory explanation

A

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

33
Q

Explain expectations theory

A

yield curve shape determined by economic factors
factors drive expected future short term interest rates
expectations change required yields

34
Q

Explain Liq Pref theory in 3 points

A

Liquid assets prefered to illiquid
Long dated are less liquid, need higher return
So upward sloped yield curve

35
Q

When would investors prefer conventional bonds than IL bonds?

A

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

36
Q

What effects the yield margin between govt bonds and corporate?

A

Security
Marketability
Compare bonds that are equivalent!

37
Q

What is the nominal yield formula?

A

n=rfry+exp inflan+ inflan rp

38
Q

What is inflation risk premium?

A

Premium for investors with real liabilities for future inflation uncertainty

39
Q

Describe money markets and market makers

A

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

40
Q

What does Money market instrument mean?

A

Short term cash deposits

41
Q

Why have industry analysts, in terms of practicality

A

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

42
Q

In terms of correlation, why have industry analysts?

A

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

43
Q

Do System T on Property, add other things

A

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

3. Exam 3 (52 decks)

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