Learning Outcome 1 - 17 standard / 11 multiple response questions / Analyse the characteristics, inherent risks, behaviour and correlation of asset classes Flashcards
Which type of debenture charge can be freely disposed of without permission from the debenture holder?
Floating
A debenture is also known as which type of security?
Fixed-interest security
What are the highest and lowest credit ratings offered by Standard and Poors?
AAA and D
What are the highest and lowest credit ratings offered by Moody’s?
Aaa and C
If a company’s credit rating is marked down, what happens to the price of its bonds and why?
They fall because they are seen as riskier investments
What does a normal yield curve indicate?
Investors expect a higher yield the longer the investment
What does a flat yield curve suggest about the economy?
The economy is stable and there are no radical changes to inflation and interest rates expected
Which 2 factors could create an inverted yield curve?
Investor expectations that interest rates will fall in the short-term
It could also be a supply and demand problem
Who estimates yield curves for the UK and how often?
BoE, daily
What is the dividend cover formula on an individual basis?
Earnings per share / dividend per share
What is the dividend cover formula on a total profit basis?
Profit attributable to ordinary shareholders / dividends paid to ordinary shareholders
What is the P/E ratio a measure of?
How highly an investor values the company
What does a low P/E ratio suggest?
Company is not greatly favoured, probably because of poor growth prospects
What does a higher than average P/E ratio indicate?
Shares are in great demand
Why might a company’s P/E ratio be higher than the industry average but but not necessarily a better buy than a company with a low P/E ratio?
Could be overpriced
Can the dividend cover indicate the riskiness of an investment?
Yes
What could a relatively high dividend cover imply with regards to the company earnings?
That they are retaining the majority of them for future investment
What is the PTM levy on trades over £10,000?
£1 flat rate charge
What is the earnings per share formula?
Profit attributable to ordinary shareholders / number of ordinary shares in issue
What can an investor ascertain from a company’s EPS?
Profitability trend
Listed companies do not have to publish EPS in their accounts. True or false?
False
Which market doesn’t pay stamp duty and stamp duty reserve tax on transfer of UK-registered shares?
AIM - alternative investment market
When is stamp duty on the transfer of UK registered shares applied?
When using a stock transfer form, over £1,000
Which is charged when transferring shares on CREST, and has no minimum charge? Stamp duty or SDRT?
SDRT
Who pays stamp duty and SDRT; purchaser or seller?
Purchaser
What are stamp duty and SDRT rounded up to when calculating charges?
What is the rate applied?
What are the minimum transaction amounts before apply a charge?
Stamp duty = next multiple of £5
SDRT = nearest penny
0.5%
Over £1,000 for stock forms, none if CREST
What is the NAV formula?
Net assets attributable to ordinary shareholders / number of ordinary shares in issue
Investors have to be resident in the UK for tax purposes to open a cash ISA. True or false?
True
If an investor wants to transfer funds saved in their ISA from the current tax year, how much can be transferred?
If an investor wants to transfer funds invested in their cash ISA from previous tax years, how much can they transfer?
Must be all of it
As much or as little as they want
When does the £1 PTM levy apply?
On trades of listed company shares over £10,000
What is the recommended tenure lease time for property?
6 or 12 months
What are the 3 main types of money market investments?
Treasury bills
Certificates of deposits
Commercial bills
Treasury bills are issued by governments to finance what?
Their short term cash needs
What are the normal maturities of a treasury bill?
1, 3, 6 or 12 months
How are treasury bills sold? Name 2 ways.
Weekly auctions
Ad-hoc basis
What is the minimum amount of purchase on a treasury bill?
£500,000 nominal
If purchasing ad-hoc, what is the maturity of a treasury bill?
1 to 364 days
Certificates of deposits carry a fixed rate of interest, usually linked to which index?
SONIA - sterling overnight index average
What are the typical maturities of a certificate of deposit?
1-3 months
Treasury bills vs. certificates of deposit, which one pays interest?
Certificates of deposit
Why do banks and building societies issue CDs?
To raise funds to finance their business activities
Which is more liquid, treasury bills or commercial bills?
Commercial bills
Who issues commercial bills and why?
Companies to fund day to day cash flows
Commercial bills are also known as what?
Short term negotiable debt instruments
What is the typical maturity of a commercial bill?
30 and 90 days
What are the 2 types of money market fund?
- Short term
- Standard
Non-investment grade bonds are also known as…
High yield or junk bonds
If an economy is in recession, interest rates may be reduced to stimulate recovery. What would happen to the bond prices?
They would be boosted as a result
The most volatile bond would have what coupon and period to redemption?
Low coupon
Longer period to redemption
What is the DMO definition of shorts, mediums and longs in terms of gilt categories?
Short - less than 7 years
Medium - between 7 and 15 years
Long - over 15 years
What is the financial press definition of shorts, mediums and longs in terms of gilt categories?
Short - less than 5 years
Medium - between 5 and 15 years
Long - over 15 years
Index linked gilts are currently measured by RPI, those issued before September 2005 use RPI how long before each payment date?
8 months
Index linked gilts are currently measured by RPI, those issued from September 2005 use RPI how long before each payment date?
3 months
What is the tax treatment on both interest income and disposals of gilts?
Exempt CGT
Income tax on income
Why does the Bank of England use the repo market?
To influence interest rates
What does it mean to strip a gilt?
Split the coupon and redemption payment so they can be held and traded in their own right
Which has the widest spread; gilts or corporate bonds?
Corporate bonds
What is a floating rate note?
Bonds that pay interest linked to a money market rate such as SONIA
What does ‘SONIA plus 50 basis points’ mean in terms of the interest rate set by reference for a floating rate note?
Additional 0.5%
A British company issues a eurobond in the USA denominated in Japanese yen, what is this eurobond called?
Euroyen
How would a bond end up trading above par?
Coupon is above current interest rates
Issuer has a strong credit rating
If an investor buys a bond priced at above par, and continues to hold it until it’s redemption date, will they see a capital gain or loss?
Loss
Which 3 things does the redemption yield on a bond take into consideration that an interest or running yield does not?
Income payments
Capital gains or losses to redemption
Value of each payment according to when it’s received
If the redemption yield is less than the interest yield, and held until redemption, will there be a capital gain or loss?
Loss
What is ignored when calculating the redemption yield of a bond and therefore unhelpful to a private investor?
Tax they have to pay
What is the typical buy back period in the repo market?
2 weeks
What happens to the yield demanded by investors if a company’s credit rating is improved?
Reduces
What is the market capitalisation formula?
Number of shares x CSP
Rent-a-room relief applies only to furnished or unfurnished rooms?
Furnished
What can the taxpayer do if the rent exceeds £7,500 when letting out a room in their own room?
Pay tax on the income over £7,500, no deductions for expenses
Be taxed on gross rent received, less expenses, and take no rent-a-room relief
What might happen to the price of gold when an economy moves out of recession and into a growth phase?
Falls
What’s the typical commitment period for a structured deposit?
5 years
What is the main difference between a structured deposit and a structured product?
How capital protection is provided
How much capital protection is offered with structured deposits and products?
100%
Which has an investor exposed to counterparty risk in the event that their capital is not protected? Structured deposits or products?
Product
If you wanted to invest for a really long time, would you be more likely to choose a gilt or a corporate bond?
Gilt
Companies traded on the AIM typically have a narrow share price spread. True or false?
False, they have a wider spread
Companies traded on the AIM typically have lower share price volatility and lower returns. True or false?
False, they’re typically higher because of their higher risk and volatility
Standard and Poor’s: which indices?
US equity
Dow Jones measures the share prices of how many and which type of companies?
30 blue chips
One of these is not weighted by market capitalisation, which one?
Dow Jones
Nikkei 225
Nikkei 225
Which index includes reinvested income when calculating value?
CAC 40
DAX 40
DAX 40
How often is the FTSE 100 membership revised?
Quarterly: March, June etc.
Which 5 things are typically included on a debenture agreement?
- Interest rate, payment dates and redemption date
- The assets backing the debenture
- Conditions imposed on borrower
In what circumstance would a preference shareholder have the right to vote?
If payment of dividends has fallen into arrears
What happens to the dividends owed to a cumulative preference shareholder when the company doesn’t make a profit?
Shortfall must be carried forward (accumulated)
Which type of preference shareholder receives an additional dividend that is usually a proportion of any ordinary dividend declared?
Participating preference shareholder
Which type of preference share represents a temporary source of finance for the company?
Redeemable preference share
How are shareholders with a deferred ordinary share compensated for their share being deferred?
Greater voting rights
Larger proportion of profits
What does market capitalisation mean?
Reflect the relative value of big and small companies on the market
What happens to the price of bonds as interest rates or inflation rise?
They fall (bonds go on opposite directions to inflation and interest)
In a low interest rate environment, many bond prices can trade above or below the nominal price?
Above
If a bond is cum (with) dividend, who receives the full 6 months interest?
Purchaser
If a bond is bought ex (without) dividend, who receives the full 6 months interest?
Seller
At what point do AIM shares become inheritance tax free?
After holding for a full 2 years
Government gilts tend to move in opposite directions to equities. True or false?
True
What is the CGT treatment on gilts?
Exempt
How long does a directly purchased gilt need left on it to hold it in an ISA?
Five years
Can a gilt fund be held in an ISA?
Yes
Private equity securities are less liquid than other listed securities. True or false?
True
Most private equity firms will seek to “exit” (realise its capital gain) via which 4 methods available?
- Selling shares back to management
- Selling shares to another private equity firm
- Trade sales (sale of company shares to another company)
- Achieve a stock market listing
How long does a private equity fund typically look to retain their investment in the private equity companies they invest in?
3-7 years
Private equity investment companies; open or closed-eneded?
Closed
Can you have listed private equity companies in your ISA?
Yes
Which sector of commercial property is the highest yielding and why?
Industrial, because of it’s shorter lifespan
Which sector of commercial property is the generally the lowest yielding and why?
Retail
If equity and retail property is doing well, what tends to happen with commercial property?
It moves in the opposite direction (it follows a cyclical pattern)
In comparing corporate bonds and gilts; only corporate bonds carry interest rate risk; true or false?
False
When interest rates fall, what happens to the price of gilts?
Rise and vice versa
Which one carries a greater liquidity risk? Gilts or corporate bonds?
Bonds
