Fixed Interest, Investments Trusts Flashcards
What is meant by duration?
- Degree bond prices change in relation to interest rates
- Inverse relationship ( rates rise, prices fall)
- Influencing factors: coupon, period to redemption, capital gains
- how long it takes in years for the price of the bond to be repaid by its internal cashflows
What makes a bond volatile?
Duration
- longer the period
- lower the coupon
most volatile is long period, low coupon
- banks will fall/ rise lower
- banks will have shorter duration
How is fixed interest taxed?
- Income taxed as Savings Income (Interest) and Starting Rate Band & PSA can be used
- Directly held = No liability to CGT – and losses not allowable
- Invest via Collective (OEIC/U.Trust) = subject to CGT – Losses are allowa
How is the ineterst paid on certain fixed interest products?
- Gilts– loans to UK government; Interest paid gross
- Corporate Bonds – loans to companies; Interest paid gross
- PIBS– loans to building societies; Interest paid gross
What is the savings rate for savings income?
- Starting rate band for savings income = £5,000
- Band reduces proportionately for any non-savings income above personal allowance (£12,500 -20/21)
- No tax payable if non-savings and savings income is less than £17,500 (20/21)
- PSA is also available
What is the Personal Savings Allowance?
- Most individuals allowed to earn interest up to a certain amount without any tax due
- Limits for 2021 -22 based upon Adjusted Net Income calc:
- £1000 for Non/Starting & Basic Rate
- £500 for Higher rate (even if just HRT drops by £500 – no tapering)
- No allowance for Additional Rate taxpayer
- The interest earned whilst charged at 0% still “eats into the available Basic Rate band”
What are Permanent Interest Bearing Securities & Perpetual Subordinated Bonds?
- Issued by Building Societies
- PSB’s were PIBs but B/Soc. now DEMUTUALISED to become a bank
- Undated i.e. Permanent
- Sensitive to interest rates
_ - Protection
- No FSCS protection
- Rank behind all depositors and other creditors
- Interest payments - non cumulative
_ - They pay Income Gross but Taxable – but can use PSA
- No CGT – directly held!
How do you calculate the Interest /Flat/Income/Running yield?
Annual Coupon (Gross)
Market Price (Clean)
x100
How do you calculate the gross redemption yield?
Interest yield
(+ or -)
_
Profit (or Loss) to redemption / No of years to redemption
/
Market Price (Clean)
What are the risks of fixed interest securities?
- Specific or commercial risks
- Market risks:Interest rates & inflation
- Volatility (Most volatile = longer dated, lower coupon)
- Duration / Modified Duration
What is Duration (Macaulay)?
- Period of time it will take to repay initial outlay (in terms of interest and capital)
- Used to measure sensitivity of fixed interest investment to changes in interest rates
- Modified Duration estimates the change in a bond’s value if there is a change in interest rate (and thus yields)
What is the formula for Modified Duration?
Duration (Macaulay)
(1 + GRY)
How would a 1% change to interest rates affect a bonds pricing?
- 1% change to interest rates
- Modified Duration x 0.01 x Clean Price = Change in bond value
- In £
What is the structure of an investment trust?
PLC:
* Invest in other companies:
* Shares (quoted / unquoted)
* Venture Capital
* Worldwide
__
* Regulated by company law
* Issue shares
* Traded on an exchange
* Share price driven by Supply & Demand
* Finite number of shares
* Closed ended
* Limited Life
* Taxation–it’s always a share regardless of underlying assets fund manager holds! So dividend taxation & CGT
* Gearing
How does pricing differ from an OEIC to an investment trust?
- OEIC: Unit price = NAV
- Inv Trust = Share price disconnected from NAV
