FSRE Topic 1 Flashcards
What are the four main asset classes?
Figure 1.1 page 2
Paper A
Cash
Property
Fixed Interest
Shares
Identify and describe the three characteristics of cash?
1.1.1 page 2
Paper A
Liquid: easily accessible and doesnt need to be converted or sold to make available.
Risk free: not subject to market forces but doesnt have potential growth in value.
Held on deposit: Can earn interest by keeping it in banks or building societies.
1.1.1 Page 2
Paper A
What are the benefits of Cash?
1.1.1 Page 3
Paper A
Risk free income from interest
Easy to accesss in short term
Suitable for those who wish to build emergency funds
What are the disadvantages of cash?
1.1.1 Page 3
Paper A
Not suitable for enhancing capital growth in the medium long term
Inflation can reduce real value over time
1.1.1 Page 3
What are Money Market Instruments?
1.1.1 Page 3
Paper A
Short term (up to 12 months) cash based financial loans
Mainly used by business and governements
What are the main types of Money Market Instruments.
1.1.1 Page 3
Paper A
Treasury bills
Commercial paper
Certificates of deposite (eg. saving accounts)
How long do bonds usually last?
1.1.2
5 to 50 years
What are the characteristics of bonds?
Can you define each term?
1.1.2
A coupon: Fixed interest paid each year
Par value: face value and amout that will be paid on redemption
Redemption date: the date when the government will repay the par value
What 2 factors determine the price of the bond?
1.1.2 Paper A
Financial strength of issuer
Interest rates:
If rates increases during the term,you can sell the bond at a lower price than the par value, if sold before redemption date.
Gilts – bonds issued by the UK governement
Treasury of 5% 2035 would be a gilt issued by the Treasury, paying 5% interest until 2035.
How much money would the gilt pay annually for every £100 par value?
1.1.2 Paper A
The gilt would pay £5 annually for every £100 par
value.
What are the 3 benefits from bonds and gilts?
1.1.2
Fixed income for a fixed term
Repayment of initial capital
Potential gain if sold when interest rate drops.
What are shares?
Can you state the benefits and disadvantages of shares?
1.1.3
Shares are sold to raise capital for investment in a comapany.
Benefits:
- High potential of capital growth
- Income through dividends
Disadvantages:
- High risk of loss
- Possibility of Dividends may not be paid
- High volitility
- Long term investment
- Not liquid like cash
What are the two types of property?
1.1.4
Comercial and Residential property
What are the important roles of the Bank of England in the UK economy?
1.2.1
- Issuer of bank notes
- Banker to the government
- Banker to the banks
- Advisor to the government
- Manages Foreign exchange and Gold
- Lender of last resort
What are the 5 catagories of the financial markets?
1.3.2
- Retail and wholesale business
- secured or unsecured borrowing
- Maturity borrowing and lending
- Primary or secondary businesses
- domestic currency of foreign exchange
What is the difference between capital and money markets?
1.3.2.1
Capital Markets: Long term borrowing and lending
Money Markets: Short term borrowing and lending
What is the difference between a Priamary and Secondary Market
Primary Markets raises new capital (buying shares from a comapany)
Secondary Market is a second hand market where the secuirities are traded (trading on a brockrages website)
What is an interbank?
1.4.1
Loans between two banks
If a bond has a coupon (interest
rate) of 5 per cent, the investor will receive
£5 for every £100 of face value owned.
What Yeild would they recieve if:
they paid £90 to buy the bond
they paid £120 to buy the bond
1.4.2
(Interest rate/pricepaid) x100
- £5/£90 x100 = 5.56%
- £5/£120 x100 = 4.17%
Where are the 5 main international stock markets?
- New York
- Tokyo
- Germany
- France
- Hong Kong
1.4.3.2
What is a financial Intermediary?
1.5.1
a financial intermediary is an institution that borrows money from the surplus sector of the economy at one rate and lends it to the deficit sector at a higher rate.
What are three main reasons for individuals or companies to transfer between currencies?
1.4.4
- International trade
- Short term investment
- Long term investment
Pros and Cons of Property
1.1.4
Pros
Capital growth through rent and value
Commercial has stable market
Cons
Vulnerable to economic conditions (no tenants)
Commercial is expensive to buy an run
Not liquid
What are the six clearing banks in the UK
1.5.3
HSBC
Lloyds Banking Group
NatWest
Barclays
Bank of London
ClearBank
What are Proprietary and Mutal Organisations?
1.5.2.1
- Proprietary organisations are owned by their shareholders
- Mutual organisations are not constituted as a company and are owned by the members
What methods are used in Money Transmission
Provision of cash
Cheque clearing
Standing orders
Current accounts
Pros and Cons of Equities (Shares)
Pros
More profit than deposit based investments
Income through dividends
Cons
Risk of capital loss and dividends not paid
Long-term
Not as liquid as cash
Money must have certain properties in order to be acceptable as a medium of exchange. What are they?
- sufficient in quantity;
- generally acceptable to all parties in all transactions
- divisible into small units;
- portable
Which two opposing groups take part in markets and what compromise do they have to make?
buyers and sellers
Describe the reinsurance market
insurers that have already accepted risks
are able to lay off some of the risk to other insurers. all risks
insured are divided up between many insurers
Why is it necessary for a strong secondary market to exist before a primary market in the same securities?
people will invest in new securities only if they know there is an organised market for selling them again.
How does the ownership of a bank differ from that of a building
society?
A bank is a proprietary organisation owned by its shareholders; a building society is a mutual owned by its members.
