PCIAM Flashcards
Allowance amounts
X 5
- share purchases and loans to companies, involving loans to small close companies / or shares in them
- partnership investment where partner pays interest on a loan to benefit partnership
- payment of iht where a loan was taken to pay. 1 years benefit
- ISA
- pension
Powers of regulatory decisions committee (RDC)
X 7
- private warnings
- variation of permissions
- withdrawal of authorisation
- withdrawal of approval
- prohibition of individuals
- public censure and statement if misconduct
- financial penalties
Upper tribunal with 28 days
Business asset rollover
- cgt deferral can be claimed by incorporated and unincorporated businesses when they sell assets send buy new assets
- must be trading
- new asset must be purchased staring one year before and three years after disposal
Dividend yield
Dividend per share /
Share price
X 100
- assess current yields with previous to determine progress
- cannot compare like to like as will have different div policies
- growth stocks may not pay a dividend
Equity based options
X 7
- Predetermined expiry dates quarterly
- physically settled
- through ICE futures Europe on around 100
- expiry date is American style
- pricing is pence per share
- call option holder - not eligible fir dividend unless exercised prior to ex- dividend
- stock specific risk
Margins futures
X 5
- Initially- deposit
- variation- loser pays each day
- spot month
- intra-day - if initial too low on volatile day
- maintenance - higher initial
Holding period return / mwr
(D + V1 - V0) / Vo
(D + v1 - v0 - c) / Vo + ( c x n/12)
V0 = starting V1 = selling D = income C = net new money in or out N = no of months remaining in year when taken or added
VCT
Income tax free
CGT free
30% tax relief on £200k
Held 5 years
- listed on stock exchange
- income must be from shares / securities
- 70% qualifying holdings
- not more than 15% in one company
- at least 30% of qualifying holdings must be new ordinary shares and at least 10% per company
- cannot invest more than £1m in any single qualifying conpany each year
- not exempt from IHT
Preference shares types
X 5
- cumulative
- non cumulative
- participating
- redeemable
- convertable
FSA
FSMA 2000
Financial service act 2012
2013
Split to fca and pra
Retail distribution review
Level 4 by 31/12/12
LSE listing requirements by fca
X 8
- market cap of 700k+ & 25% shares free
- market cap of bonds 200k
- no restrictions on shares
- no more than 30% voting rights
- 3 years audited accounts
- directors experience
- pre-vetted prospectus by UKLA
- less stringent in science based
Capital requirement directive
3 pillars 1/1/14
To ensure that firms (eg banks, building societies and investment firms) hold adequate resources and have adequate systems and control to manage both business and associated risks
1 - quantification of risks arising for financial firms trading and credit business
2- robust requirements on public disclosure to encourage stronger market discipline in ensuring firms hold appropriate capital for their business
3 - stronger constructive dialogue between firms and regulator on risks and the level of capital which should be held
Business asset disposal relief
5 qualifying
- Introduced in April 2008
- cgt at 10% up to £10mill now £1mill
- disposal of sole trader business
- disposal of partnership share
- dis of shares in trading g company where they are employed and gave 5% share or more
- assets that have been loaned to business
- shares bought through enterprise management scheme
Chattels CGT
Exempt if value less than £6k or wasting assets (less than 50 years)
If sold for less than 15,000 gain limit
5/3 (sale price - 6000)
Treynor ratip
(Rp - Rf) / B
Six stage performance review
- benchmark
- benchmark asset allocation
- asset class returns
- comparison of asset classes
- compare benchmark with portfolios
- compare stock selection
Formula of profi loss of a future
No of ticks × tick value × no of futures
Ftse 100
Tick size 0.5 point
Tick value £5
Backwardation
- future price is below cash price
- bid price is greater than ask price
REITS
- closed ended
- listed on recognised exchange
- uk resident
- 1 class of share
- 75% profits from rental
- at least 3 properties
- min interest cover 1.25
Ring fenced property let
- exempt from corporation tax
- 90% rental profits paid 12 months
- payments paid net 20%
Non ring fenced
- subject to 19% corporation tax
Covered warrant
Gives the right to buy or sell underlying asset a specified price on or before date
Option issued by 3rd party will cover / hedge exposure by buying underlying stock or futures/options
Cover ratio eg 25 :1 share
Working capital ratio (current ratio)
Current assets /
Current liabilities
1.5 and 2 acceptable
ORB - order book for retail bonds
X 5
- London stock exchange 1/2/10
- liquid and transparent market in retail bonds
- all listed on London main markets
- provides a similar facility to that which is used for share dealing for a select number of gilts
- directly as sophisticated or via broker
- fixed interest T+2
New issue methods
X 6
- fixed price offer
- tender offer
- offer for sale
- offer for subscription - invest trusts
- placing (selective marketing)
P/E Price earning ratio
Market price for shares /
EPS earning per share
High ratio indicates do well and grow, low lower growth more established. Extremely low could mean undervalued
Index based options
X 7
- available for monthly expiry dates for first 3 months then quarterly to 24 months
- no physical asset
- available through ICE futures Europe, FTSE 100 options, FTSE index flex options
- FTSE index have European style expiry dates
- £10 per index point (tick size 0.5 tock value £5)
- no dividends
- diversifed risk
Modified duration
Mod duration =
- macaulay duration / (1+GRY)
Md = bond with highest duration is the bond whose price will move the most given any change in interest rates
Minimise risk by buying higher coupon shorter term
Overestimates fall and underestimate rise
Junk bond
X 3
- below investment grade
- below BBB standard and poor
- high yielding
Financial policy Committee FPC
X 3
- a Committee of BOE
- identify, monitor and take action to reduce or prevent systematic risk with a view of protecting and enhancing uk financial system
- 2nd support economic policy of government
Business relief
X 2 rates
100%
- interests in unincorporated business
- shareholding in unquoted or AIM
50%
- shares controlling more than 50% voting rights in fully listed company
- land, buildings, plant and machinery used for business controlled by donor
Needs to have owned fir 2 years
Fit and proper
X 3
- honesty, integrity and reputation
- competence and capability
- financial soundness
Drawbacks of emerging markets
X 6
- restriction on foreign ownership
- foreign exchange restrictions
- taxation
- additional costs
- lack of transparency and info
- corporate governance
Insider dealing
Explain
3 x defence
Dealing on the basis of price sensitive info that has not been made public
Criminal offence 1980 7 years
- did not expect to make a profit
- reasonable grounds to believe info disclosed widely enough
- would have dealt anyway
Market abuse - civil with unlimited fine
Standard deviation
- 26% one standard deviation
- 5% in two
- 75% in three
Square root of variance
Measures how much it differs around its mean
Discretionary trust tax
£1000 standard rate 7.5 % / 20 % 38.1% / 45% CGT £6,150 Expenses can be relieved Must make sure enough in tax pool 30% of trust charge 20% = 6% 10 year Exit x/40 3 month periods x 30% of effective rate Stamp duty add 3% Cost are grossed up
When can invest managers accept goods or services from brokers when carrying out transactions for clients
No
- executes orders through a broker or another person
- passes these charges to the customer
- is offered goods and services in return fir these charges
Yes
- linked to arrangement and conclusion of transaction
- provided between invest man making invest decision and been carried out
Re research
- capable of adding value
- represents original thought
- intellectual rigour
Permissable orders
X 8
- at best
- limit (upper and lower limits)
- execute and eliminate (can be partial)
- fill or kill
- market
- iceberg
- hidden limit orders
- hidden pegged orders
Accumulation tryst
- can accumulate income and add to trust capital
- can pay income out like discretionary
Fca
1 x strategic objective
3 x operational
- ensure relevant markets function well
- protection for customers
- protect and enhance integrity of financial system
- effective competition
Investment trust
- public limited company
- board of directors
- closed end funds
- able to gear
- conventional - indefinite
- Split capital
Income / capital / zero div pref - 10 % max into other trusts
- Corp 19% tax on foreign or unfranked
CFDs
X 7
- can be on companies as well as indices
- don’t buy underlying asset. Hard to purchase index
- rising or dropping (short)
- geared products
- no stamp duty
- CGT payable
- stop losses available
130/30
- Ability to short a % of portfolio to improve performance
- rank shares in order of expected returns
- then short sell securities at bottom to raise up to 30% of fund value
- money raised buys more of top ranking
Dividend cover
Earnings per share EPS /
Dividend per share DPS
- Ability to maintain current dividend that is paying out
- useful for income investors
- high could mean retaining profits for future
Earnings per share EPS
Profits after interest, tax and pref div /
Number of ordinary shares
Legal requirements of valid trust
X 3
3 certainties
- intention
- subject
- object
What is beta
Measure of sensitivity compared to market
Arbitrage
Seek low risk profits by exploiting price anomalies in the market
Professionals - keeps markets efficient
Eg sell asset and buy future
Fundamental investing
- value investing - Ben Graham 1930s
- concentrates on balance sheet ratios like price to book
- results, profits, balance, cash flows
- GAR
- top down / bottom up
EIS
Tax free in product Dividends taxable CGT free if held 3 years 30% tax relief max cont £1mill Unlisted Qualifying trade Gross assets must not exceed 15mill /16mill after Fewer than 250 employees IHT exempt after 2 years
TWR - fund manager return
V1/V0 x V2/(v1 +c) - 1
Capital employed
X 4
- share capital
- reserves
- loans
- overdrafts
Bare trust
X 5
- Single beneficiary
- entitled to capital and income at 18 if full mental capacity
- can buy stocks and shares
- parental settlement rules for tax 100
- prevent 3% additional property duty
Gilts coupon
%/2 X Index ratio % is changed to decimal
Types of domicile
X 4
- Origin
- Choice
- dependency
- deemed
Leave uk resident lose deemed after 3 years for iht and income cgt 6 years
POA
- enduring (old)
- lasting poa ( heath and welfare / property and financial affairs)
MiFID II updated areas
X 7
- suitability and appropriateness
- costs and charges
- illustrations
- governance
- 10% drop
- research
- reporting
Limitations of indices
X 5
- don’t take into account costs or tax
- most track price movements not including div reinvestment. If total div is quoted as being reinvested on ex div date
- assumes investor is fully invested in constituent companies at all times
- survivorship bias
- weightings by market cap leads to high covariance portfolio where favoured sectors do over present
Investment styles
X 6
- growth
- value
- thematic
- fashion led
- contrarian
- lifestyle
Classification of trusts
X 5
- express
- implied
- resulting
- constructive
- secret
What is pure expectation theory
- states that long term yields are the geometric average of expected short term rates.
- yield curve is a reflection of market expectations of interest rates
Monetary policy Committee MPC
X 4
- committee of BOE
- set inflation target - open letter of 1% out
- set interest rates
- 9 members with 4 external
What is Sharpe ratio
- measures excess returns for every unit of risk measured by standard variation
Sharpe = (Rport - Rf) / standard dev
RDR / MIFID charges
- RDR - adviser and platform charges
- Mifid 11 - more transparent fees. Effects of costs and charges on investment
Aggregation and allocation
X 5
A firm aggregates orders with its own
- no client disadvantage
- disclosed to the client
- order of aggregation policy established
- likely to benefit client
- could disadvantage
Convertables
- hybrid of debt/pref share and equity
- pure bond or preference share with a call option
- option cost on top of purchase price - lowers yield
- conversion premium is excess of conversion price over equity price
- subject to cgt unlike corporate debt
Cov price = market price / conv ratio
Sharpe ratio
(Rp - Rf) / sd
Conversion price / premium
Conversion price
Market price / ratio
Premium
Conversion - share
Debt to equity ratio
(Int bearing loans + pref share capital)/
Ordinary shareholder funds
KIDS
X 4
- aims
- your commitment / investment
- risks
- questions and answers
PP communication
X 6
- can’t dictate future
- not more prominent than other info
- covers at least five yrs
- affects of charges and commission
- explain simulation
- promotions completed by approved person
What are ETF
- Trades like a normal share on LSE
- invests in diversified mix
- low cost
- shares / commodities/ fixed income
Share price - Gordon growth
Share price =
Dividend/(return required - div growth)
20p/ 0.1 - 0.05 = 400p
Term assurance
X 7
- level term
- increasing term
- renewable- no more uw
- convertible - wol / endowment
- decreasing
- family income benefit
- unit linked - sell units to fund life
Price / book ratio
Current price of share / Book value (nav/no of shares)
Info ratio
(Rp - Rb) / tracking error
Contribution to return formula
(Actual - bench) x bench asset distribution
Endowments
5 x types
5 x qualifying rules
- non-profit - fixed some on death or may
- with profit - guarantee + bonuses
- low cost - DTA element
- low start
- unit linked endowment
10 years or more Payable at least annually Sum assured not less than 75% of total premium over term Not more than twice of any other year Not more than 1/8 of over term
Return of equity ROE
Profit after tax and pref div /
Capital and reserves (shareholder)
X 100
% return company is achieving on amount of funds provided by shareholders. Above average rates is a good company
Fair, clear not misleading
5 points
- if fca mentioned must note activities not covered
- must state if capital at risk
- yield quotes balanced
- complex investment must be clearly explained
- packaged product - provider accurately described
Indices - weightings or constituents of share
X 3
Price weighted arithmetic- price per share
Average of all prices of stocks on index (dow Jones 30 Industrial/ nikkei 225)
Unweighted geometric
(Sp 500 equal weight)
Market value weighted arithmetic
Average of market capitalisation
(Ftse 100 / S&P 500)
Free float - amount of securities available for outside investors. Takes away institutional and government holdings in banks.
Capped - upper limit to weighting on market capitalisation
Fundamental- data such as cash flow, book value, earnings rather than market cap
What is stagging
- buying intital Public offerings and selling at profit when trading begins
SRI / Esg
Continued indefinitely without causing harm to current or future generations or exhaust natural resource.
Principles focused
Styles
- meet certain standards
- change agents - env message is clear
- responsible ownership policy - good business practices
Positive / negative screening
ESG - returns focused
- no negative screen
Earnings yield
Earnings per share /
Current market price
X100
Adjusted net income
- Personal allowance
- child benefit
- calculate net income
- take off pension from net pay or gift aid
Gilts
Flat/interest/running yield calc
Redemption yield
1 Flat yield =
(Ann gross coupon / clean price) x 100
2 Red yield
(Red value - current price)/yrs left
Divide by current price then x 100
Then 1 minus 2
Interest cover
Profit before interest and tax /
Net interest paid
X 100
How many times interest will be paid from current profits
Splitting rights / max subscription at nik cost
(No of rights x subscription price) / theoretical ex rights price
If nil paid rights less than £3k or less than 5% of value of holding proceeds are deducted from original cost and cgt deferred
Wol
X 4
- non profit
- with profits - reversionary / terminal bonus , MVRs
- low cost
- unit linked - reviews 10 then 5
Alpha
Actually return - CAPM
CAPM
Er = Rf + B(rm - Rf)
Provides amount of compensation and investor needs for taking additional risk of the market
Reinvestment relief into EIS shares
- similar to business rollover
Liquidity or quick assets ratio
Current assets - stock /
Current liabilities
Power of appointment / flexible trusts
- power of appointment to appoint or vary beneficiary dependent on how they are drafted
- default beneficiary who has right to income (interest in possession) and possibly capital
- common for life insurance. Can change beneficial interest and trustees
CREST
4 x services
- guarantee settlement of crest member transactions up to debut cap
- record each members obligation on cash memorandum account real time
- settle members position at end of day
- act as collector of transfer tax SDRT
Credit default swap
X 2
- derivative that pays on bond default event
- rate gives a measure of credit risk
AER
AER = (1 + r/n)n - 1
n (1+r)-1
Rule 72
72/ interest rate
Approx length if time to double
Trustees act 2000
X 6
- investment powers
- duty of care
- investment duties
- delegation of trust functions
- paying fees to trustees
- insuring a trust
Available NSI
X 6
- premium bonds 1%
- junior isa 1.5%
- income 0.01%
- investment account 0.01%
- direct saver 0.15%
- direct isa 0.1%
What is information ratio
- risk adjusted return to measure fund managers performance rather than closet indexing
info = (Rport - Rbench) / tracking error
Return of capital employed ROCE
Profit before interest and tax/
Capital employed
X 100
Better comparison between companies than ROE as ROE is heavily by differences in capital structure some of which have higher debt funding
SEIS
tax free in product Dividends taxable CGT free after 3 years 50% tax relief up to £100k Fewer than 25 employees UK based Under 2 years old Trade in approved sector Not raise note than 150k via seis No more than 200k gross assets Not controlled by investor receiving their capital Investors can't have more than 30%
What is asset and liability management
Risk management technique to earn adequate return, while maintaining a comfortable surplus of assets beyond liabilities
Gap, scenarios and duration analysis
What is Alpha ratio
- risk adjusted measure of active return
- measure of stock picking skill
Alpha = actual - CAPM
Risks of emerging markets
X 5
- political
- volatility
- liquidity
- safekeeping
- currency
Contango
If futures price is higher than spot
Interest in possession trust
- right to income or use assets
- sometimes from a will
- legislation enacted in 2006 treats these in same way as discretionary trust for IHT
- 7.5% and 20% income
Fca notices x 6
- warning
- decision
- further decision
- discontinuance
- final
- supervisory
Tracking techniques
X 4
- full replication
- Stratified sampling
- optimisation - comp modelling
- synthetic - swaps / derivatives
Hmrc penalties
Filing
Miss deadline £100 3 months £10pd up to 900 6 months 300 or 5% 12 months 300 or 5% 12 months and withholding info 100% / 70% or 300
30 day late payment 5% of tax
6 months 5% or 300
12 months 5%
2.6 % interest charge / 0.5% overpayment
Future or present value
FV = PV(1+r)n
Priority order liquidation
X 8
- liquidators fees
- fixed charge
- preferential creditors
- floating charge holders
- unsecured creditors,
- subordinate creditors
- preferential shareholders
- ordinary shareholders
Hold-over relief
- form of cgt deferral
- gifts of certain assets
- acquisition cost is reduced by held over gain
- both donor and donee must claim and donee is resident in uk
Benefits of emerging markets
X 6
- faster economic growth
- savings rates usually high
- inefficient pricing
- industry representative
- attractive valuations
- low correlation to developed
Charitable trusts
X 3
- Promote a purpose and do not primarily benefit an individual
- charitable purposes only
- charities act 2006 states 13 purposes
Adjusted income
Threshold
Adjusted Total gross income \+ pension contributions from net income - personal contributions - lump sum death benefits subject to tax
Threshold Total gross income - tax reliefs - lump sum death benefits subject to tax \+ Salary sacrifice entered and pension lost
Residence test
Non
- less than 16 days or 46 if not been classed as resident for 3 years
- work full time abroad, in uk less than 91 days and worked less than 30
Yes
- 183 days or more
- only home is in uk spent at least 91 days there of which 30 this tax year
What is Treynor ratio
- risk adjusted return based on systematic risk
- beta for volatility
Treynor = (Rport - Rf) / Beta
Smart beta
- combine passive and active strategies
- uses alternative index construction to traditional market- cap indices
- empathises capturing investment factors or narjet inefficiencies in a rules based transparent way
- may uses alternative weighting schemes such as volatility, liquidity, quality,value, size
- 2019 $880 billion
Regulatory reporting
X 8
- benchmarks
- method and frequency of valuation
- delegation of discretionary
- types of investment and transactions
- management objectives and risk
- custodian details
- transparency of costs
- 10% rule
Options terminolgy
X 7
Buyer Seller Intrinsic value - current price minus exercise Time value - premium minus intrinsic In the money At the money Out the money
Split capital trusts
X 4 types of share
Zero div preference
- limited life no income
- right to capital on wind up
- high priority
- utilise CGT
income shares
- may have pre set maturity value
- could offer high income and nominal redemption
- offset CGT loss
income and residual
- ordinary or highly geared ordinary
- high and rising income
- surplus assets at wind up
Capital shares
- no income surplus assets
- potential for capital growth
Market abuse
X 7
- insider dealing
- improper disclosure
- misuse of info
- manipulating transactions
- manipulating devices
- dissemination/ pumpn dump trash n cash
- distortion or misleading behaviour
Structured products
X 6
Index linked- long or undated Accelerated - growth (say 200%) but could lose Reverse - bear tracker Digital- coupon based on two references Capital secured Scarps
What is liquidity preference theory
- investor in longer dated bonds has to wait longer for money to be repaid therefore greater risk which requires greater return
- upwards sloping normal curve
B and C shares
B - same as ordinary but Dividends are given as shares instead. Taxed as recieved cash div
C - converted to ordinary shares when bulk of new cash has been invested converted on nav basis
Types of ETF
X 7 + 2
- index
- commodity
- bond
- currency
- actively managed
- hedge fund
- leveraged
- smart beta
- physical / synthetic
Number of days
30 days hath Sept, April, June and nov
Ppf
06/04/05
90% subject to cap £41,462 age 65 100% if already reached NRA or in recept of suvivors benefit 21 years long service 3% increase 50% spouse 25% child 5/4/97 cpi 2.5% nothing before
Isa limits
H2b 3k bonus on 12k
Lifetime 4k pa 18/40 25% bonus age 60 house under 450m
JISA 9k
Corporate debt
X 9
Convertibles Warrants - eurobond- diff currency Eurosterling- non uk comp Bullet / balloon Foreign bonds - issued by overseas com Callable Puttable Debentures
DMO hm treasury
- carry out governments debt management policy of minimising costs over the long term, taking account of risk, whilst ensuring consistency with monetary policy
- DMO approved investors
PRA
- promotes safety and soundness of firms it regulates
- insurers - degree if protection to policy holders
