R02 Flashcards
Cash investments accounts
Cash is liquid, no capital appreciation - pays interest
Fixed term accounts - leave in there for 1-2 years and offer fixed rate of return
Notice accounts - have to give 30-60 days notice before withdrawal
Structured deposits - pay interest based on performance of an index and will pay capital return on maturity ‘guaranteed investment account’
Cash and ns&i
Cash can be held in ns&I for tax free investments think PICK
Money as an investment
Treasury bills - short term money market instrument managed by DMO
Used by government to raise cash- they don’t pay interest but bills issued are at below par and redeemed at face value
Money market funds
Two types of money market funds
Short term - weighted average maturity of no more than 60 days and weighted average life of no more than 120 days
Standard term funds - weighted average maturity of no more than 6 months and a weighted average maturity of no more than 12 months
Can invest in a combination of cash, cash deposit/Treasury bills
Fixed interest securities
Long term investment between 2-30 yrs: a loan from the investor and pay return for having access to capital
All share the same characteristics
Fixed redemption value, repaid after set period, set return known as coupon
Risks associated with fixed interest securities
There is an inverse relationship between the price of the bind and interest rates
Main risks associated with bonds:
Commercial/specific - risk for indiv issues
Market/systematic - risk to asset class as a whole
Liquidity risk - some bonds can be hard to sell
Default risk - chance a issuer cannot pay the interest or capital back
Bond volatility
Bonds with lower coupons and longer redemption periods are more volatile because coupon payments exposed to movements in interest rates for longer periods
Gilts and classification
They are classified by there time to redemption
Shorts DMO less than 7yrs
Shorts financial press less than 5yrs
Mediums DMO 7-15yrs
Mediums financial press 5-15yrs
Longs over 15yrs
Undated - ni specific redemption date
Undated gilts work like other but with one difference -
if gilt issues before 2005: the value of rpi is taken 8 months prior to each payment date
If issued post Sept 2005 then it is taken 3 months prior
Repo and repo rate
The amount paid to the investor investing in GILTS essentially the rate of interest paid
The repo rate is used by the BoE to help set interest rates
To help increase liquidity the repo was created (sale and repurchase) - sold from one to another with promise to buy back at future date and price
Tax on GILTS
Cgt Free but fully liabke to income tax
Strips market
For the fixed interest market to help makes gilts more liquid
Separated out the coupons and redemption value and both are sold separately.
Strips do not pay interest instead investors receive face value on maturity - prior to this they would trade at discount
Corporate bonds - loans to companies
Risk - greater chance of default - larger to company lower the risk
It is an alternative for companies to raise capital than going to the bank
Where a secured loan uses assets as fall back this is known as a debenture
Another type of bond is a convertible bond - option to revert to shares, these bonds trade at a premium if share price doing well and vice versa
Permanent interest bearing shares (PIBS) and Perpetual subordinated Bond (PSB)
Offered by building societies and traded on stock market, no longer available, where building society demutualises a PIBS becomes a PBS
Trading fixed interest securities
Bond trading at par it is trading at nominal value - where above nominal value this is above par and below, below par
Clean prices - the quoted mid market price - price between buying and selling and do not include interest accrued
Interest is paid twice yearly and where a bond is sold the timing of the next payment determines the position
Cum (with) dividend - the purchaser receives full interest even tho the bind has not been held for 6 months, to compensate the buyer will pay clean price plus an amount of interest, typically paid 1 working day after purchase
Ex (without) dividend - where bond is sold within 7 days of next coupon payments the seller will receive full coupon payments, to compensate the price paid will be adjusted
The actually price paid is the ‘dirty’ price
The bonds market
Primary market - where initial sale takes place, DMO issue gilts weekly via auction. Noy usually possible for indiv investors to take part. If they do they put a bid in and if successful pay average of bid prices. For large inv they bid prices and if successful pay the bid price
Secondary market - where stock are traded, each company has a credit rating via standard & poors and Moody’s - e.g. AAA anything below BBB is a sub investment grade bond
Bond yields
Running yields - what return is it currently offering (interest yield) -
coupon/clean price X 100
Redemption yield - works out gain or loss at maturity as a % of current price. Measure of performance of held to maturity
((Nominal price - clean price)/clean price) x 100%
Equity and shares
This is part owning the capital of a company, there’s a primary and secondary market for shares
The main market - company is listed and is listed to the public in the main market i.e LSE - there are a lot of requirements for this
The alternative investment market - regulated by LSE - for smaller firms with lower barriers to entry
Types of shares
Ordinary shares - tank behind preference shares in receiving dividends
Preference shares - fixed rate of return similar to bonds - hey rank higher in event company went bust.
Different type of preference shares:
Cumulative - if payment missed paid back in times if higher profit
No cumulative - not clawed back
Participating- as well as fixed div, share if wider profits in good yrs
Redeemable - firm can buy back shares where desired
Convertible - convert to ordinary
Cost of buying and selling shares
Commission to dealer, stamp duty it SDRT
Risks of investing in equities
Volatility of dividends, capital loss, third party failure, currency risk, liquidity risk, regulator risk
Important to diversify- invest in different shares, industries, geography
Earning per share
Remember it is profit after Corp tax, minority interest and pref shareholders
Profit to ordinary shareholders / number of ordinary shares in issue
Price/earnings ratio (P/E)
How the company is valued
Current share price / earnings per share
Dividend per share
Return received from share on annual income
(dividend per share / current share price) x 100
Dividend covers
How many times dividend paid out from periods of profit
Earnings per share / dividends per share
Net asset value
Value of a company
Net asset attributable to ordinary shareholders / number of ordinary shares in issue
Liquidity
Business ability to meet debt
Current assets - stock / liabilities
Gearing
Measure of borrowing
Long term debt / shareholders funds
Grouping and watching equity indicies
Allows investors to see movement in markets as a whole. Problem is weighted to market capitalisation, large companies have heavy impact on effect of indicies
Property
Very illiquid, needs to be managed, void periods, increased tax
Stamp duty lank tax due 14 days after transaction has taken place
Renting out part of your home
7500 household relief
Property income allowance - no tax is income less than 1k
Property rental yields
Rent per month x 12 / cost on property x 100
True rental yields
Rent per month - monthly fees x 12 / cost of property + SDLT + solicitor fees x 100
Alternative investments
Works of art, collectables
Commodities
Hard - mined stuff, gold, oil, gas
Soft - grown stuff, coffee, wheat
Quantitative easing
Print money to stimulate economy
What is the interest rate target
2%
Impact of trends on macro economic environment
Trends have a big impact, investors stop looking at fundamentals and follow trends which inflates price creating a bubble…
Political impact on economy
American sneeze what happens in America then follow worldwide
The human factor - aging population
The economic cycle
Expansion: strong demand for goods, growth in sales and profitability, demand starts to overtake supply, prices start to rise (inflation) economy starts to overheat and interest rates start to rise
Boom: highest point in cycle, economy growing at its fastest, interest rates increase again, demand will start to fall
Slowdown/contraction: inflation could still be high as demand starts to fall, business sales start to decrease and unemployment starts to rise, interest rates start to fall
Recession: seceerve economic downturn, profits are weak, people aren’t spending as much, inflation falls, interest rates fall
Gross domestic product GDP
Common way to illustrate how an economy is doing, one quarter economy shrinks is known as a contraction, two successive is a recession
Public sector net cash requirement
What comes in and out of a countries economy - is there more coming in than out, if there is a recession the PSNCR will grow and vice versa
How much cash is needed to function
How does the economic cycle effect our investment decisions
Fixed interest - inverse relationship with interest rates and inflation
Equities - inflation high, equities to well as more people buying and vice versa
Government policies and the economic cycle
Fiscal policies - government spending more of cutting tax in times of economic downturn. Gov increase tax and decrease spending in times of boom
Gov Spending money will have more impact then cutting tax rates… Gov spending goes in economy whereas cutting tax people could save it…
Monetary policies - controlling interest rates
Easing monetary policy - short term reduction in interest rates followed by long term
Tightening - opposite of above
What is SONIA
the rate at which banks lend to each other and the rate in which they do
Money supply - how.mich money there is in the economy
2 common measures
M0 - notes and coins plus banks operational money held with BoE - this shows stonf consumer spending and retail sales
M4 - inc all deposits created from lending banks plus money held by savers and banks and coins - suggests more lending is taking place
How can central banks influence the amount of money in the economy
Buying and selling bonds
Selling bonds reduces amount of money as people invest
Buying increases amount as it puts more money in ppls hands
Inflation
This is the price of goods and services on a month to month basis
There are a number of ways this can be measured
Retail price index - used for index linked Gilts
Consumer price index - allows comparison across European counties
Types of inflation
Disinflstion - where inflation rises at a slower rate then they have been
Deflation - where prices actually start to fall
Stagflation - inflation is high but growth is flat
Exchange rates
Based on supply and demand - where a country is producing goods, people need their currency to buy it, increase demand increase price… It strengthens the currency against other currencies
Equally if interest rates in a country are high, people will want to invest in cash deposits in that country, increasing demand for currency
Real exchange rates
Allows us to measure how competitive one country is compared to another accounting for inflation
Balance of payment
Money in vs money out of a economy, deficit shows more money going out, surplus shows more money coming in
Capital account
Measures financial flows and investment in and out if an economy
Major investment theories - modern portfolio theory
Modern portfolio theory - diversification
Standard deviation - the extent the return varies from the expected return. A higher SD would indicate more volatility
Reducing risk with MPT
By holding different investments within a portfolio will reduce the risk, it is important to consider the correlation between the assets to see how diversified the portfolio is
Correlation can be measured on a scale from +1 to -1
Positive correlation if one stock moves 10% the over moves 10% in the same direction
Negative correlation if one moves up 10% the other moves down 10%
Options and futures
Options - gives option to sell but do not have to if don’t want to (it can expire)
Futures - have to sell at agreed price