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Chpt 1 - CISI > Investment Products > Flashcards

Investment Products Flashcards

1
Q

What is a fixed Income collective investment scheme

A

Type of fund which invests into bonds

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2
Q

What is an equity collective investment scheme

A

They invest in stocks and may focus on specific country or region

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3
Q

What is a hybrid collective investment fund

A

Fund that is usually made up of bonds/equities

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4
Q

What is a closed-ended investment fund

A

Does not accept new money or redemption’s while the fund is being managed and works with a fixed number of shares

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5
Q

5 benefits of CIS’s

A

Liquidity
Access to large denomination securities
Diversification
Low transaction costs
Managerial expertise

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6
Q

What is the point of Packaged Retail Investment & Insurance Products (PRIIPs)

A

They enhance comparability with Undertakings in Collective Investments in Transferable Securities (UCITS) funds and improve the overall comprehensibility of financial products for retail investors

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7
Q

What is an ETF

A

Exchange-traded fund as a diversified basket of securities, UCITS regulated

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8
Q

What are Income Shares

A

Pay out all the income received by the investment trust and purchased by investors who find income convenient and tax efficient

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9
Q

What are ‘A’ Shares

A

Ordinary shares, carry no voting rights and often pay dividends over ordinary shareholders

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10
Q

What are Zero dividend Preference shares

A

pay no dividends and earns income from capital appreciation

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11
Q

What are Stepped Preference Shares

A

Have an income entitlement which grows at a predetermined rate and carries a predetermined maturity

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12
Q

What are Packaged shares

A

bundle together capital, income and zero preference shares to create nearly an equivalent to an ordinary share

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13
Q

Whats is a Real estate investment trust (REIT)

A

It is a fund which invests in property and can provide a more tax-efficient way of investing rather than directly in property.

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14
Q

Benefits and Issues of Gearing in Open and Closed ended funds

A

Can make greater gains than a fund that doesn’t borrow however, if poorly invested fund must repay loans on top of losses incurred

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15
Q

Difference between reporting fund and non-reporting fund

A

Reporting fund must report to investor and HMRC details of income
Non-Reporting fund falls within offshore fund status but has not obtained reporting fund status

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16
Q

How is on offshore reporting fund taxed

A

Income and dividends are taxed at standard rates as well as CGT rates

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17
Q

How is an offshore non-reporting fund taxed

A

No personal allowances can be used and all income taxed as Offshore Income Gain

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18
Q

Charges that may be included by fund manager in open-ended funds

A

Initial charge
Exit Charge
Annual Management charge

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19
Q

What is single pricing

A

1 price is applied to a fund’s units/shares for all transactions in that period.
It is done by valuing a funds net liability and dividing this by no. of units/shares in issue to give an NAV

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20
Q

What is dual pricing

A

Investors are offered a bid and offer price for shares in the fund
Bid price = price to sell back to the fund
Offer price = investors price to by shares in fund

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21
Q

What is the difference between forward and historic pricing

A

Forward pricing = prices dealt at next valuation point
Historic pricing = prices dealt at last valuation point

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22
Q

What are the features of a lifetime ISA

A

Annual limit £4,000
Gov bonus of 25% at age 50+
Must be opened between 18-40

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23
Q

Why would you not get a 25% charge to withdraw from Lifetime ISA

A

Money used to buy first home max £450,000
withdrawal made age 60+
investor is terminally ill

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24
Q

What is the difference between Regular and Single Premium Bond

A

Regular bond involves a series of periodic payments
Single Bond involves a one off payment to the life company

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25
Q

What is a unit linked bond

A

Premiums paid by policy holder are used to buy units in funds which the life company will invest in

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26
Q

What is a with-profit bond

A

This bond offers a benefit payable at some future maturity date
Policy holder pays into premiums which the life office invests by which re-visionary and terminal bonuses are paid

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27
Q

What are distribution bonds

A

Bonds has a separate account for income & capital
To produce income a distribution bond will invest in various bonds & equities where income from this is placed in a saperate fund

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28
Q

Benefits of an offshore bond

A

Tax Free
5% tax free cumulative withdrawals per annum
suitable for long term investors

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29
Q

What are Portfolio Bonds

A

Offered to wealthy investors
choose own investments/manager
Existing portfolio can be used as premium
No longer tax efficient

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30
Q

What is a level Term Assurance

A

Sum assured does not vary during term, when term expiries so does policy

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31
Q

What is increasing term assurance

A

Sum of assurance increases, usually annually

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32
Q

What is Renewable Term Assurance

A

Gives the chance for the life assured to take out a further term assurance

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33
Q

What is convertible term assurance

A

Allows for conversion to whole-of-life or endowment assurance contract

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34
Q

What is decreasing term assurance

A

The sun assured decreases until 0 and the policy remains the same

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35
Q

What is family income Benefit

A

Form of DTA, designed for beneficiaries to receive regular payments and will pay this from death till end of policy

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36
Q

What is Unit-Linked Term assurance

A

Premiums paid each month, invested in units & units are cancelled to pay for assurance

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37
Q

What is a non-profit whole-of-life policy

A

High level premiums that are payed throughout lifetime. They pay out a fixed sum when the assured dies

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38
Q

What is a With-profit whole-of-life policy

A

Offer the opportunity for the sun assured to be increased with bonus payments.

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39
Q

What is a low-cost whole-of-life policy

A

Sold as 1 product but is a combination of with-profit and DTA

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40
Q

What is Endowment Assurance

A

Combine life cover over a specific term with a guarantee that there will be some kind of payment

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41
Q

What is a Non-profit endowment policy

A

Basic form - level premiums and a pay-out of a fixed sum on maturity or early death

42
Q

What is a with-profit endowment Policy

A

Guaranteed sun assured to be payed out on death or on maturity at the end of term

43
Q

What is a low cost endowment policy

A

Guarantee full pay out on death

44
Q

What is Low start endowment policy

A

Lower initial premiums that rise over time and settle at a higher figure

45
Q

What is bootstrap funding

A

Described as a means to minimise outside debt & equity financing needed from banks and investors

46
Q

What is venture capital

A

Provided in earlier stages and usually invested into high growth companies in interest of generating a return

47
Q

What are reasons for a leveraged buyout

A
  • Taking public company private
  • To sell off part of a business to make its own company
  • To improve an underperforming company
    -To acquire a competitor
48
Q

What is Growth Capital

A

Involves investing in mature companies looking to expand or restructure

49
Q

What is Equity Co-investment

A

Finding a co- investor to invest in less than 50% of company

50
Q

What is Crowdfunding

A

Looks at gathering lots of small investments from a large group of people and it also requires a cooling off period in case people change their mind

51
Q

4 Types of Crowdfunding

A

INVESTMENT-BASED - investments through buying shares/denatures
LOAN BASED - investors loan money in return for interest payments
DONATION BASED - Donations made and in return may receive a reward
REWARD BASED - Investors receive a reward that is linked to the investment

52
Q

What is an Enterprise Investment Scheme (EIS)

A

Helps smaller, higher risk trading companies to raise finances by offering reliefs to investors who purchase new shares in those companies

53
Q

Rules to qualify for EIS

A
  • Must have permanent establishment in UK
  • Company must not be traded on stock exchange
  • Company must not be controlled by another company
  • Gross assets < £15m
  • Max employees 249
54
Q

What reliefs are available for EISs

A

Income Tax - 30% for up to £1m investments
CGT - if EIS sold for profit not liable to CGT
Loss Relief - if shares are disposed off at a loss, investor can offset this against yearly share disposal
IHT Relief - Have to be held for at least 2 years at time of death

55
Q

What are the 4 things Derivatives used for

A

HEDGING - Reduces impact of adverse price movements to mitigate risk
ANTICIPATING FUTURE CASH FLOWS - If cash flow expected purchase price can be fixed
ASSET ALLOCATION CHANGE
ARBITRAGE - Risk free profit by taking advantage of a price anomaly between buying and selling

56
Q

What is a future/forward contract

A

Agreement between buyer and seller by which a buyer agrees a price for an asset to be delivered at a pre-specified date

57
Q

Derivatives - What does Long mean?

A

Is committed to buying the underlying asset at the pre-agreed price on future date

58
Q

Derivatives - What does Short mean?

A

Committed to delivering the underlying asset for the pre-agreed price on the specified future date

59
Q

Derivatives - what does Open mean?

A

Initial Trade

60
Q

Derivatives - what does Basis mean

A

Difference between the cash price of asset and future price

61
Q

Derivatives - what does Close mean

A

Can hold future to expiry or sell before

62
Q

What is an Option

A

Gives the buyer right to buy or sell a specified quantity of an underlying asset at a pre-agreed price on pre-specified date

63
Q

Options - What does call option mean

A

Gives the buyer right to buy an asset

64
Q

Options - what does Put Option mean

A

Gives the buyer the right to sell an asset

65
Q

Options - what does Holder and Writer mean

A

Holder - buyer of an option referred as a long position
Writer - seller of an option referred as short position

66
Q

What is the premium and strike price

A

Premium - price paid for an option
Strike Price - price at which an asset can be brought

67
Q

What is the difference between:
At-the-money
In-the-money
Out-the-money

A

At-the-money - strike price same as asset price
In-the-money - strike price is below asset price
Out-the-money - strike price is above asset price

68
Q

What are Call Option Strategies

A

Holders - take a long call position
Writers - take a short call position

69
Q

Qualifying for A Seed Enterprise Investment Schemes

A
  • New Qualifying Trade
  • Gross Assets up to £200,000
  • <25 employees
  • Trading less than 2 years
  • Max lifetime amount £150,00 & no previous investment
70
Q

Call Options - Holder Risks and Rewards for Long Position

A
  • Higher price = More Profit
  • Profit is unlimited
  • Max loss is limited to premium Paid
71
Q

Call Options - Writer Risks and Rewards for Short Position

A
  • Hoping for Price to fall so holder abandons
  • Max Profit = Premium
  • Max loss = unlimited
72
Q

Put option strategies

A

Holders take long position
Writers take short position

73
Q

Put Options - Holders Risk and Reward Long Position

A

Max Profit is strike price less premium
Max Loss is premium paid

74
Q

Put Options - Writers Risk and Reward Short Position

A

Max Profit is Premium paid
Max loss is strike price less premium

75
Q

What is Premium for an Option made up from?

A
  • Intrinsic Value, difference between exercise and share price
  • Time Value, an options with long expiry time will have greater amount of time value
76
Q

What is American Style Option Type

A

An option that may be exercised at a time in its life up to expiry

77
Q

What is Asia Style Option Type

A

Pay off depends on the average price of the asset over a certain period of time

78
Q

What is European Style Option type

A

Option may only be exercised on expiry

79
Q

What is Bermudan Style option type

A

Option that can be exercised on Pre-determined dates

80
Q

What affect option premiums

A
  • Underlying asset price - Higher price = more value
  • Exercise Price - More valuable put options less valuable call options
  • Time to maturity
  • Volatility of Asset Price
81
Q

What are warrents

A

Negotiable Securities issued by companies which confer the right to buy a certain number of shares at a present price before a pre-determined date

82
Q

What are covered warrents

A

warrents in company shares issued by anyone but the company itself and gives the holder right to buy or sell an asset at a specified price on or before a specified date

83
Q

Hedge fund characteristics - Regulation

A

Domiciled in offshore financial centers

84
Q

Hedge fund characteristics - Structure

A

established as maximised or collective investment schemes

85
Q

Remaining Hedge fund characteristics

A

High Minimum investments - most in excess of 50k
Investment Flexibility - lack of regulation
Gearing - most funds use leverage and derivatives
Cost - fees for the fund

86
Q

What are the Hedge Fund Strategies

A
  • Market Neutral - Takes long and short positions in mis-priced securities
  • Hedged Equity - involves buying equity in some form as an underlying investment then securing hedge to potentially offset loses
87
Q

What are types of Arbitage in hedge funds

A

Merger Arbitage - looks to get a deal premium from a merger & acquisition
Relative Value Arbitage - takes advantages of perceived price situation
Statistical Arbitage - uses quantitative & computational techniques to put stocks into pairs

88
Q

Hedge Fund Strategies - Continued

A

Event Driven - seeks price inefficiencies that may occur before or after corporate event
Distressed Securities - invest in companies close to bankruptcy with view they improve
Emerging Markets - seeks out investment in emerging or less developed markets

89
Q

What is a Fund of Hedge Funds and what benefits do they have

A

Invests in a portfolio of hedge funds
- Economies of scale
- Diversification
- Managerial Expertise

90
Q

What is an absolute return fund

A

An absolute return fund aims to deliver a positive investment return irrespective of market conditions and over a predefined period not exceeding three years

91
Q

What are the 3 biases caused by no mandatory reporting standards

A
  • Self-selection Bias - disclosure of info is not mandatory
  • Backfill bias - lack of database may mean incomplete financial records
  • Survivorship Bias - only successful funds remain & present their records over time
92
Q

Types of structured products - Principle-Protected Investments

A

Investors usually give up a portion of equity appreciation in exchange for principal protection

93
Q

Types of Structured products - Return Enhanced Investments

A

Ideal if market returns are likely to be flat to slightly up and in exchange for accepting full exposure it can offer 2x or 3x returns

94
Q

Types of structured products - Income based investments

A

Offer varying degrees of principal protection and are primarily focused on generating one or more coupon

95
Q

What is Constant Proportion Insurance

A

allows an investor to maintain an exposure to the upside potential of a risky asset while providing a capital guarantee against downside risk

96
Q

What is a Defined Benefit Pension Scheme

A

pay pension based on 2 things length of time the employee has been employed and salary

97
Q

What is a Defined Contribution Pension Scheme

A

Individuals pension pot is built up for each employee through contributions by both employer and employee

98
Q

What are Self-Invested Personal Pensions (SIPPs)

A

Type of personal pension where the investment decisions are entirely in your hands. You either manage your investments yourself or ask a professional, like a Financial Adviser to take care of them on your behalf and the money you pay into your SIPP can usually go into a wide range of investments

99
Q

What is a Small Self-Administered Schemes (SSASs)

A

Company scheme where the members are usually all company directors or key staff, no limit to contributions but tax relief is restricted to £3,600.

100
Q

Conditions to borrow a loan for Self-Administered Schemes

A
  • Should not exceed 50% of the net market value of the schemes assets
  • loan should be secured against assets of equal value
  • loans not longer than 5 years
  • interest of at least 1% above base bank rate
101
Q

4 Types of Annuity

A
  • LIFETIME ANNUITY - handover all or part of pension to life company so it pays income for rest of life
  • IMPAIRED LIFE ANNUITY - pays out higher income to those with medical conditions as shorter life
  • ENHANCED ANNUITY - Available to those in poor health or anyone who worked in hazardous occupation
  • DIFFERED ANNUITY - pays regular payments or lump sum at a future datev=

Chpt 1 - CISI (7 decks)

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