Investment Products Flashcards
What is a fixed Income collective investment scheme
Type of fund which invests into bonds
What is an equity collective investment scheme
They invest in stocks and may focus on specific country or region
What is a hybrid collective investment fund
Fund that is usually made up of bonds/equities
What is a closed-ended investment fund
Does not accept new money or redemption’s while the fund is being managed and works with a fixed number of shares
5 benefits of CIS’s
Liquidity
Access to large denomination securities
Diversification
Low transaction costs
Managerial expertise
What is the point of Packaged Retail Investment & Insurance Products (PRIIPs)
They enhance comparability with Undertakings in Collective Investments in Transferable Securities (UCITS) funds and improve the overall comprehensibility of financial products for retail investors
What is an ETF
Exchange-traded fund as a diversified basket of securities, UCITS regulated
What are Income Shares
Pay out all the income received by the investment trust and purchased by investors who find income convenient and tax efficient
What are ‘A’ Shares
Ordinary shares, carry no voting rights and often pay dividends over ordinary shareholders
What are Zero dividend Preference shares
pay no dividends and earns income from capital appreciation
What are Stepped Preference Shares
Have an income entitlement which grows at a predetermined rate and carries a predetermined maturity
What are Packaged shares
bundle together capital, income and zero preference shares to create nearly an equivalent to an ordinary share
Whats is a Real estate investment trust (REIT)
It is a fund which invests in property and can provide a more tax-efficient way of investing rather than directly in property.
Benefits and Issues of Gearing in Open and Closed ended funds
Can make greater gains than a fund that doesn’t borrow however, if poorly invested fund must repay loans on top of losses incurred
Difference between reporting fund and non-reporting fund
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
How is on offshore reporting fund taxed
Income and dividends are taxed at standard rates as well as CGT rates
How is an offshore non-reporting fund taxed
No personal allowances can be used and all income taxed as Offshore Income Gain
Charges that may be included by fund manager in open-ended funds
Initial charge
Exit Charge
Annual Management charge
What is single pricing
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
What is dual pricing
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
What is the difference between forward and historic pricing
Forward pricing = prices dealt at next valuation point
Historic pricing = prices dealt at last valuation point
What are the features of a lifetime ISA
Annual limit £4,000
Gov bonus of 25% at age 50+
Must be opened between 18-40
Why would you not get a 25% charge to withdraw from Lifetime ISA
Money used to buy first home max £450,000
withdrawal made age 60+
investor is terminally ill
What is the difference between Regular and Single Premium Bond
Regular bond involves a series of periodic payments
Single Bond involves a one off payment to the life company
What is a unit linked bond
Premiums paid by policy holder are used to buy units in funds which the life company will invest in
What is a with-profit bond
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
What are distribution bonds
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
Benefits of an offshore bond
Tax Free
5% tax free cumulative withdrawals per annum
suitable for long term investors
What are Portfolio Bonds
Offered to wealthy investors
choose own investments/manager
Existing portfolio can be used as premium
No longer tax efficient
What is a level Term Assurance
Sum assured does not vary during term, when term expiries so does policy
What is increasing term assurance
Sum of assurance increases, usually annually
What is Renewable Term Assurance
Gives the chance for the life assured to take out a further term assurance
What is convertible term assurance
Allows for conversion to whole-of-life or endowment assurance contract
What is decreasing term assurance
The sun assured decreases until 0 and the policy remains the same
What is family income Benefit
Form of DTA, designed for beneficiaries to receive regular payments and will pay this from death till end of policy
What is Unit-Linked Term assurance
Premiums paid each month, invested in units & units are cancelled to pay for assurance
What is a non-profit whole-of-life policy
High level premiums that are payed throughout lifetime. They pay out a fixed sum when the assured dies
What is a With-profit whole-of-life policy
Offer the opportunity for the sun assured to be increased with bonus payments.
What is a low-cost whole-of-life policy
Sold as 1 product but is a combination of with-profit and DTA
What is Endowment Assurance
Combine life cover over a specific term with a guarantee that there will be some kind of payment
What is a Non-profit endowment policy
Basic form - level premiums and a pay-out of a fixed sum on maturity or early death
What is a with-profit endowment Policy
Guaranteed sun assured to be payed out on death or on maturity at the end of term
What is a low cost endowment policy
Guarantee full pay out on death
What is Low start endowment policy
Lower initial premiums that rise over time and settle at a higher figure
What is bootstrap funding
Described as a means to minimise outside debt & equity financing needed from banks and investors
What is venture capital
Provided in earlier stages and usually invested into high growth companies in interest of generating a return
What are reasons for a leveraged buyout
- 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
What is Growth Capital
Involves investing in mature companies looking to expand or restructure
What is Equity Co-investment
Finding a co- investor to invest in less than 50% of company
What is Crowdfunding
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
4 Types of Crowdfunding
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
What is an Enterprise Investment Scheme (EIS)
Helps smaller, higher risk trading companies to raise finances by offering reliefs to investors who purchase new shares in those companies
Rules to qualify for EIS
- 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
What reliefs are available for EISs
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
What are the 4 things Derivatives used for
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
What is a future/forward contract
Agreement between buyer and seller by which a buyer agrees a price for an asset to be delivered at a pre-specified date
Derivatives - What does Long mean?
Is committed to buying the underlying asset at the pre-agreed price on future date
Derivatives - What does Short mean?
Committed to delivering the underlying asset for the pre-agreed price on the specified future date
Derivatives - what does Open mean?
Initial Trade
Derivatives - what does Basis mean
Difference between the cash price of asset and future price
Derivatives - what does Close mean
Can hold future to expiry or sell before
What is an Option
Gives the buyer right to buy or sell a specified quantity of an underlying asset at a pre-agreed price on pre-specified date
Options - What does call option mean
Gives the buyer right to buy an asset
Options - what does Put Option mean
Gives the buyer the right to sell an asset
Options - what does Holder and Writer mean
Holder - buyer of an option referred as a long position
Writer - seller of an option referred as short position
What is the premium and strike price
Premium - price paid for an option
Strike Price - price at which an asset can be brought
What is the difference between:
At-the-money
In-the-money
Out-the-money
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
What are Call Option Strategies
Holders - take a long call position
Writers - take a short call position
Qualifying for A Seed Enterprise Investment Schemes
- New Qualifying Trade
- Gross Assets up to £200,000
- <25 employees
- Trading less than 2 years
- Max lifetime amount £150,00 & no previous investment
Call Options - Holder Risks and Rewards for Long Position
- Higher price = More Profit
- Profit is unlimited
- Max loss is limited to premium Paid
Call Options - Writer Risks and Rewards for Short Position
- Hoping for Price to fall so holder abandons
- Max Profit = Premium
- Max loss = unlimited
Put option strategies
Holders take long position
Writers take short position
Put Options - Holders Risk and Reward Long Position
Max Profit is strike price less premium
Max Loss is premium paid
Put Options - Writers Risk and Reward Short Position
Max Profit is Premium paid
Max loss is strike price less premium
What is Premium for an Option made up from?
- Intrinsic Value, difference between exercise and share price
- Time Value, an options with long expiry time will have greater amount of time value
What is American Style Option Type
An option that may be exercised at a time in its life up to expiry
What is Asia Style Option Type
Pay off depends on the average price of the asset over a certain period of time
What is European Style Option type
Option may only be exercised on expiry
What is Bermudan Style option type
Option that can be exercised on Pre-determined dates
What affect option premiums
- Underlying asset price - Higher price = more value
- Exercise Price - More valuable put options less valuable call options
- Time to maturity
- Volatility of Asset Price
What are warrents
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
What are covered warrents
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
Hedge fund characteristics - Regulation
Domiciled in offshore financial centers
Hedge fund characteristics - Structure
established as maximised or collective investment schemes
Remaining Hedge fund characteristics
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
What are the Hedge Fund Strategies
- 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
What are types of Arbitage in hedge funds
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
Hedge Fund Strategies - Continued
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
What is a Fund of Hedge Funds and what benefits do they have
Invests in a portfolio of hedge funds
- Economies of scale
- Diversification
- Managerial Expertise
What is an absolute return fund
An absolute return fund aims to deliver a positive investment return irrespective of market conditions and over a predefined period not exceeding three years
What are the 3 biases caused by no mandatory reporting standards
- 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
Types of structured products - Principle-Protected Investments
Investors usually give up a portion of equity appreciation in exchange for principal protection
Types of Structured products - Return Enhanced Investments
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
Types of structured products - Income based investments
Offer varying degrees of principal protection and are primarily focused on generating one or more coupon
What is Constant Proportion Insurance
allows an investor to maintain an exposure to the upside potential of a risky asset while providing a capital guarantee against downside risk
What is a Defined Benefit Pension Scheme
pay pension based on 2 things length of time the employee has been employed and salary
What is a Defined Contribution Pension Scheme
Individuals pension pot is built up for each employee through contributions by both employer and employee
What are Self-Invested Personal Pensions (SIPPs)
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
What is a Small Self-Administered Schemes (SSASs)
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.
Conditions to borrow a loan for Self-Administered Schemes
- 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
4 Types of Annuity
- 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=
