Main asset classes Flashcards
Order these in priority if a company liquidates:
Ordinary shares
Creditors
Preference shares
- Creditors
- Preference shares
- Ordinary shares
What are the differences between ordinary and preference shares?
- Ordinary shares have voting rights whereas preference shares don’t.
- Preference shares pay fixed rate of dividend half-yearly, whereas ordinary shares are not guaranteed a dividend
What’s the difference between cumulative and non-cumulative preference shares?
If a dividend payment is missed, cumulative shareholders are entitled to it at a later date.
How is stamp duty and SDRT levied on equities?
SD - 0.5% of purchase price rounded up to the nearest £5 and waived for purchases <£1000.
SDRT - 0.5% of purchase price rounded to the nearest penny, no minimum transaction amount
What is a scrip dividend?
It is a dividend paid in the form of additional shares instead of cash. Treated as cash dividend therefore income tax liable but no SD/SDRT
If total earnings are £9m, of which £1m is distributed to preference shareholders and a further £500k is kept as reserves, what is the earnings per share if there are 6 million ordinary shares in issue?
9-1=£8 million attributable to ordinary shareholders
8/6 = £1.33 earnings per share
Total dividends of £6 million were paid out to 10 million ordinary shareholders, and the current share price is £7. What is the dividend yield?
Dividend per share = £0.60
0.6 / 7 = 8.57%
If the earnings per share are £3.50 and there are 4 million ordinary shares in circulation, what is the dividend cover if total dividends are £4 million?
4 mil * 3.5 = £14 million total earnings
14 mil / 4 mil = 3.5
What are the income tax, CGT and IHT characteristics of the four main asset classes?
Cash - savings income (set against PSA), no capital gain, falls within estate
FIS - savings income (set against PSA), exempt from CGT, falls within estate
Property - non-savings income, CGT liable, falls within estate unless main residence and have direct successors
Equities - dividend income (set against dividend allowance), CGT liable, falls within estate unless unlisted shares held for minimum of 2 years
Describe the ‘parental £100 rule’.
If the parents gift money to child into a cash ISA and it earns £100 in interest, that would all be registered to the parent. If it’s under that, the child keeps it.
A eurobond issued by the UK denominated in Yen inthe US would be …
A euroyen bond
Is it the clean or dirty price that excludes the built-up interest, and is this the price that is paid by an investor?
It is the clean price and no, the investor will pay the dirty price.
If a bond is purchase ex-dividend, what does this mean?
The interest payment has been made in the last 7 days and the seller will receive the full six-months’ interest. However, the price is adjusted to reflect the buyer’s deprived interest. Thus, they’ll pay the clean price minus the interest due in respect of the period for which the buyer owned the bond but which went to the seller.
A bond has the following characteristics: Clean price: £170 Nominal value: £150 Coupon: £5 8 years to maturity
What is the running yield and the gross redemption yield?
Running yield = 5/170 = 2.94%
Gross redemption yield = 2.94% + [(150-170)/8]/170 = 1.47%
What would investors expect to happen to interest rates if there is an inverted yield curve?
Go up in the short-term and/or fall in the long-term, making shorter-dated bonds more preferable
How does the strips market work?
Gilts are separated into their individual coupon and redemption payments to be traded in their own right. A gilt can be split up into a maximum of the total number of coupon payments plus one.
How does a corporate bond tend to differ from a government bond?
- Typically more volatile
- May be less liquid
- Wider spread between buying and selling prices
- Creditworthiness changes more frequently
What is a floating rate note (FRN)?
They are a type of bond that offers a floating coupon, usually linked to a money market rate such as SONIA. Price is unlikely to change unless creditworthiness changes.
Mohamed has bought a property for £200,000 that has a gross rent of £24000. He also spent £5,000 on other purchasing costs and has around £10,000 of expenses. What are the headline and net rental yields?
Headline = 24000/200000 = 12% Net = (24000-10000)/(200000+5000) = 6.83%
Commercial bodies are levied SDLT at 15% on residential purchases over what value?
£500,000
How much rental income can be earned tax-free under rent-a-room relief?
£7,500 and you are unable to offset expenses
If an investor wanted to invest in property, what types of investment could he choose?
REITs Listed Property Co Shares Property UTs/ITs Insurance Co Property funds PAIFs
What is the difference between hard and soft commodities?
Hard commodities are mined i.e. gold/silver
Soft commodities are grown i.e. wheat/sugar
What is ‘bed and breakfasting’?
An investor sells an equity at the end of the day on the last day of the tax year to utilise their CGT allowance, before buying it back at the start of the next day. Effectively outlawed in 1998.
Are NS&I products entitled to FSCS protection?
No as they are already backed by government
Which NS&I products offer a tax-exempt return?
Direct ISA
Junior ISA
Premium bonds
Over what threshold is the Panel on Takeovers & Mergers levy due?
£10,000
What is the maximum weighted average maturity for a short-term money market fund?
60 days
What is the maximum weighted average life for standard money market funds?
12 months
Brian has bought a commercial property for £670,000. How much SDLT will he pay?
£150k x 0% = £0
£100k x 2% = £2k
£420k x 5% = £21k
Total = £23k
