Flash Cards

Question 1

Features of Index-linked gilts

Answer 1

• Coupon payments & capital repayment are adjusted in line with inflation as measured by RPI
• Before Sept 2005 - RPI 8 Months before / After Sept 2005 RPI 3 months before
• Disposal not liable to CGT
• All interest taxable + inflation uplift

Question 2

Non-voting Ordinary Shares

Answer 2

• Identical to normal OS - carry no/restricted voting rights
• Keep control of company in a few hands
• Higher risk than normal OS

Question 3

Deferred Ordinary Shares

Answer 3

• Do not qualify for dividend until ordinary shares has reached a pre-determined level/specific period
• Greater voting rights/entitled to larger profits
• Relatively uncommon

Question 4

Alphabet Shares

Answer 4

• Ordinary shares that are divided into letters with different rights

Question 5

Cumulative Preference Shares

Answer 5

• Usual unless stated otherwise
• If dividend unpaid, shortfall carried forward
• Dividend must be paid to Preference ahead of OS

Question 6

Non-cumulative Preference Shares

Answer 6

• Lose the right to any unpaid dividend at the end of the financial year
• No arrears due when dividend payments resume

Question 7

Participating Preference Shares

Answer 7

• Pay a fixed rate of dividend
• Allow holder to participate in company profits
• Receive additional dividend

Question 8

Net Asset Value

Answer 8

• Value of the tangible assets that are attributable to the ordinary shareholders.
• Measures the amount available to shareholders if the company were to close down

Question 9

Price Earnings (P/E) Ratio

Answer 9

• Measure of how highly investors value the earnings of a company

Question 10

Dividend Cover

Answer 10

• Measures how many times the dividend could be paid out of the available current earnings

Question 11

Dividend Yield

Answer 11

• Measures the dividend as a percentage return on the current share price

Question 12

Earnings per Share

Answer 12

• Most widely quoted statistic

- Measures the profit attributable to ordinary shareholders divided by the number of OS in issue

Question 13

Net Present Value of Rent Payable

Answer 13

Calculated by:

• Annual Rent x Term of the Lease
• Apply discount for inflation
• Deduct threshold figure

Question 14

Jensen’s Alpha

Answer 14

• Difference between the return you would expect from a security and the return that it actually produces.

a = Actual portfolio return - [Rf + Bi(Rm-Rf)]

Rf = risk free rate of return
Rm = market return
Bi = beta of the fund portfolio

Question 15

Beta

Answer 15

• Measures the sensitivity of a security in relation to the market as a whole
• Market/Systemic Risk
• Measures volatility

Question 16

Aim of a Real Estate Investment Trust

Answer 16

Provide a savings and investment vehicle that:

• provides a liquid market in property investment
• is widely accessible by the private investor
• has a tax treatment that is closely aligned to the tax arrangements

Question 17

Disinflation

Answer 17

Decrease in the rate of inflation

Question 18

Deflation

Answer 18

Opposite of inflation - prices decline over time

Question 19

Stagflation

Answer 19

• Combination of stagnant growth and inflation

- Can’t be fixed by increasing IR

Question 20

General characteristics of a bond

Answer 20

• Fixed rate of interest
• Fixed redemption value
• Fixed redemption date

Question 21

Guaranteed Income Bond

Answer 21

• Single premium
• Provides guaranteed income each year for a specific period (payable in arrears)
• On maturity capital is returned
• Term usually 5 years

Question 22

High Income Bond

Answer 22

• Based on packages of derivatives
• Offer high income level
• Do not guarantee return of capital
• Return of capital depends on performance of one stock market index (or average of 2 or 3)
• If index meets pre-set performance target over the period o the bond, capital is returned in full
• If target not met, payment at maturity less than original investment

Question 23

Guaranteed Growth Bond

Answer 23

• Similar to guaranteed income bond except pay no income
• Single premium
• Guaranteed a capital sum in 3, 4 or 5 years time
• Capital sum free of CGT, basic-rate income tax already deducted at source
• High returns based on advantageous tax position of the life policies

Question 24

Unit-linked Bond

Answer 24

• Aimed at higher-rate tax payers
• Liability to basic-rate income tax is covered by tax paid within the funds
• Investor may take 5% of original investment with immediate tax liability
• Can be continued for 20 years/initial capital has been returned
• Relatively high net return when compared with fully taxable investments
• If growth > 5%, final encashment also growing.
• 5% return on fully taxed investment requires gross yield of 8.33%

Question 25

Distribution Bond

Answer 25

• Distinguish between income and capital
• Maximum of 60% total equity content; Minimum 50% sterling-based assets; yield of at least 110% of FTSE All-Share yield
• Income must be capable of being paid to the investor
• Income paid by underlying assets so doesn’t eat capital investment (can still rise/fall)
• Unit price falls with payout on distribution date
• Taxation the same as ordinary unit-linked bonds

Question 26

Guaranteed Equity Bond

Answer 26

• Unit-linked bonds with form of guarantee
• Fixed-term single premium life assurance policies
• Guarantee the return of the original cash investment on maturity + percentage of growth in the index
• If surrendered before fixed anniversary date, normal unit value principle applies
• Guarantee achieved by fixed-term deposit or zero-coupon bond

Question 27

Protected Equity Bond

Answer 27

• Allow investors to select a quarterly guaranteed level of protection - between 95% - 100% of the capital at the start of the quarter
• Protected against falls in excess of selected level
• Greater the level of protection, slower the bond’s value will rise if underlying index rises