PCIAM - Financial Instruments & Products Flashcards
CASH
Advantages
- FSCS protected
- not exposed to investment risk
- liquidity
- foreign currency can provide opportunities in exchange rate movements
Disadvantages
- only returns are interest
- real value / purchasing power eroded by inflation
- no real potential for capital growth
- company offering products might now be protected
- may be penalties for early encashment
- foreign deposits may provide sufficient liquidity
Investment Accounts
NS&I
- 16+ or guardian can open for -16
- min £20, max £1m
- variable rates
- interest taxable, paid gross
Direct Saver
NS&I
- 16+
- withdrawals permitted (online or phone)
- min £1, max £2m
- interest taxable, paid gross
Income Bonds
- provide monthly income.
- interest variable
- min £500, max £1m
- interest taxable, paid gross
- no encashment penalties but must keep £500 to keep account open
Guaranteed income bonds
NS&I
- guaranteed monthly income for 1 year
- fixed rate of interest
- min £500, max £1m
- interest taxable, paid gross
- no early withdrawals
Guaranteed growth bonds
NS&I
- provide guaranteed return for 1 year
- fixed interest
- min £500, max £1m
- interest taxable upon maturity, paid gross
- no early withdrawals
Green Savings Bond
NS&I
- savings contribute towards green projects
- interest fixed for 3 years
- min £100, max £100k
- interest taxable, paid gross
- no early withdrawals
Premium bonds
NS&I
- tax free
- 16+ or guardian -16
- min £25, max £50,000
- lump sum or monthly investment
- prizes monthly, ranging £25 - £1m
- 22,000:1 chance of winning for each £1
- capital remains static, no interest or divs
- can encash anytime
Direct ISA
NS&I
- version of cash ISA
- tax free
- 18+
- min £1, max £20k p/a
- variable rates
- can enchash early, no penalties
JISA
NS&I
- tax free
- child ISA, 0-18
- CTF can be transferred into this
- min £1, max £9k p/a
- variable interest
- no withdrawals, automatically turns into ISA at 18
PIBS
Permanent interest bearing shares
- issued by building societies
- subordinated unsecured loan stock
- pay fixed interest, higher than gilts and CB
- subject to income tax
- high risk, volatile assets
- there is a secondary market, can be illiquid resulting in wide spreads
- trade in round lots of £1,000, can be callable
Perps
- subordinated irredeemable loan stock
- stock issued by now demutualised building societies
Yield gap
Difference between the dividend yield on ordinary shares (e.g FTSE100) and the redemption yield on the relevant gov/bond index
Reverse yield gap
Usually the norm for Treasuries to yield more than equities, with bonds needing to pay higher yield as compensation for erosion of spending powers of cash flow.
The reverse yield gap is when equities yield more than bonds.
Macaulay’s duration
Calculates the weighted average time before a bondholder would receive a bonds cash flows.
The bond with the highest duration is the bond whose price will move the most, for a given change in interest rates.
