Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

R02 > R02 > Flashcards

R02 Flashcards

1
Q

Cash? (5)

A
  • Interest
  • No capital growth
  • Easy access
  • Greater security
  • Low return
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Cash

Investment risks? (5)

A
  • Default risk - credit worthiness of firm and compensation it has
  • Inflation
  • Interest rate - especially when variable
  • Currency - if invested in other currency
  • Re-investment - if original high interest but end of fixed period interest rate may have decreased
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Cash

FSCS compensation limit?

A

£85,000 per person per institution - parent company only

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Cash

Types of accounts? (4)

A
  • Current
  • Instant access
  • Notice (30 - 120 days) - penalty for early access. Often interest paid penalty
  • Term Deposit (1 - 5 years) - fixed interest rate during term
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Cash

Structured Deposits (SD)?

How do they differ to Structured Products (SP)?

A

SD: Pay interest based on performance of index

SP: Fixed term greater of original investment / % change index

SD: Capital Protection provided by deposit taking firm

SP: Capital Protection provided by third party

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

National Savings and Investments (NS&I)

Which products have tax free returns? (4) (P.I.C.K)

A
  • Premium Bonds
  • ISAs
  • Fixed and IndexLinked Savings Certificates
  • Children’s Bonds
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

National Savings and Investments (NS&I)

Which products are paid gross but are taxable? (4) (G.I.I.D)

A
  • Guaranteed Growth/ Income Bonds
  • Income Bonds
  • Investment Account
  • Direct Saver
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Money Market Instruments? (3)

A
  • Treasury Bills - minimum £300,000
  • Certificates of deposit
  • Commercial Bills - short term loans to Government / bank for lower interest rates
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Money Market Instruments

Treasury Bills

How does it work? (4)

A
  • Issued by Debt Mananagement Office
  • Weekly auctions
  • Bought at lower face value and sold at above face value - no interest rate but provides growth
  • Risk Free, short term (maximum 6 months)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Money Market Instruments

Treasury Bills

Access for private investors?

Can invest in?

A

Collective investment vehicles - offers diversification i.e. lower default risk

Short term Money Markets fund

WAM = lower 60 days life = lower 120 days

Standard Money markets fund, weighted average maturity = 6 months life = 12 months

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Money Market Instruments

Certificates of Deposit (CD)

How do they work? (4)

A
  • Issued by banks
  • Fixed term and fixed return - usually relate to LIBOR
  • Returns higher than Treasury Bills as no guarantees
  • Can’t withdraw early but can sell on stock market
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Money Market Instruments

Commercial Bills

How does it work?

A
  • Issued by companies
  • 30 - 90 day loans
  • Bought lower than face value, sold higher than face value
  • Returns greater than Tresury Bills & Certifictes of Deposit as higher risk
  • Are tradeable as proof of ownership can be sold on stock market
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

ISAs

Max age for JISA?

If 17?

A
  • Below 18
  • If 17 - can have adult ISA, only hold cash and JISA, can hold other asset classes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

ISAs

5% rule?

A

If investment likely return + 95% of investor’s money in a 5 year period from initial investment date - can be included in Cash ISA

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

ISAs

Flexible ISA rules?

A

If take money out you can add that money back in in the same tax year, without it impacting your allowance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Indirect Investments

Examples of income? (4)

A
  • Pension Income
  • Distribution from FI Collectives
  • Distribution from EQ Collectives
  • Investment Bonds
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Tax Wrappers

3 Stages?

A
  • How initial investment treated
  • How funds are taxed within wrapper
  • How proceeds are taxed on investor
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

ISAs

How are proceeds taxed on the investor?

A

Interest and dividends are paid gross, no capital gains tax

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Child Trust Funds (CTFs)

Desrcibe? (4)

A
  • Available 2002 - 2011
  • Government contribution £250 initially - increased to £500
  • Savings/ Shares / Stakeholder options
  • Additionally investments permitted of £4,668
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

JISA

Describe? (2)

If 17?

A
  • Eligible if born after January 2011
  • Max per year £9,000

At 17, can get £20,000 plus £9,000

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Children’s savings

£100 rule?

A

Interest earned from the total amount gifted is less than £100 a year, it will be treated as the child’s

If it is greater it will be treated as the parents for income tax purposes

JISAs and CTFs are exempt

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Fixed Interest Securities

What are they?

A

Way of institutions funding longer term requirements

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Fixed Interest Securities

Investors entitled to?

A

Interest payments and return of capital at end of term = PAR value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Fixed Interest Securities

Know as?

Terms?

Tradeable?

A

Negotiable fixed interest, long-term debt instruments

2 - 30 years

Can sell to third party

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Fixed Interest Securities

What is their nominal value?

How are they taxed?

A

£100

Income tax, no capital gains tax unless sold on stock market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Fixed Interest Securities

Must show? (3)

A
  • Issuer’s name
  • Coupon - amount of interest you receive
  • Maturity date
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Fixed Interest securities

Price quoted on FT?

Seller receives and buyer receives?

A

Mid/ clean price - price paid if no adjustments are made for interest due

Seller gets lower mid price and buyer receives lower mid price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Fixed Interest Securities

When does interest accrue and when is it paid?

This creates what problem?

A

Accrued daily and paid half yearly

when buying and selling who gets the interest - agreement needs to be made

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Government Bonds

Also know as?

Are they risk free?

A

Gilts - Government Invested Long Term Security

No but low risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

Government Bonds (Gilts)

Classification?

A

Classified by term until redemption

Shorts = < 5 years

Medium = 5 - 15 years

Longs = > 15 years

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Government Bonds (Gilts)

Index Linked bond?

Coupon normally?

Issued before Sep-05?

After Sep-05?

Know as?

A

Interest payment and redemption price adjusted with RPI

Coupon normally lower

Before Sep-05: RPI from 8 months prior ro coupon date

After Sep-05: RPI from 3 months

Indexation lay

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Repo Market

Aim?

A

Improve liquidity of gilt market - traders can use gilts as securities for transactions

Used by the Bank of England to influence interest rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Repo Market

What is it?

A

Sale and Repurchase Agreement Market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Repo Market

Buy back period?

A

Usually 2 weeks but range from overnight to several months

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Repo Market

Strips Market?

Referred to as?

A

Separate Trading of Registered Interest and Principal Securities

Separates Gilts into interest (coupon) and redemption payments.

E.G. 20 strips of coupon 1/2 yearly for 10 year gilt - 1 strip for redemption payment

Zero coupon instruments - pay no regular interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Bonds

Sensitive to? (2)

A

Sensitivity determines how an investment changes with fluctuations in outside factors

Bonds - changes in interest rates and inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Bond sensitivity

Duration?

A

A bond’s duration reflects changes in the bond’s price for each 1% fluctuation of the interest rate. For example, a bond with a duration of 4 means the bond price decreases/increases 4% for every 1% increase/decrease in interest rate. A bond with a long maturity and low coupon has a longer duration and therefore is more sensitive to rate fluctuations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Bond sensitivity

The lower the coupon?

Longer its period to redemption?

A

The higher the volatility:

  • as a higher coupon leads to a higher return in short run
  • as bond holder receives a return sooner
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

Convertible Bonds

What are they?

A

Unsecured loan stock - can convert bond into ordinary shares

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Convertible Bonds

Characteristics - explain?

  • Coupon
  • Conversion Rights
  • CGT
A
  • Coupon - Interest paid in usual way but lower coupon
  • Conversion rights vary - either time period for conversion / specific date
  • CGT - not exempt
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

Convertible Bonds

If conversion date expires?

Fluctuates in value?

A

Turns into conventional bond

Normally with issuers share price i.e. higher share price - higher bond price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

FRN

What does it stand for?

Definition?

A

Floating Rate Notes

Securities issued by companies where interest rate linked to a money market rate e.g. LIBOR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

FRN

Coupon paid?

A

1/2 yearly / quarterly

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

FRN

Price?

A

Normally close to nominal value

Change in interest rate - security itself will change

But likely to alter with change in credit worthiness of company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

PSB

What does it stand for and is it?

A

Perpetual Subordinated Bond

A PIBS but issued by Bank not a Building Society

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

PIBS

What is it?

A

Permanent Interest Bearing Share - high yielding Fixed Interest issued by Building Societies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

PIBS

Qualities? (4)

A
  • Fixed rate of interest
  • Building Society do not have to redeem them
  • Interest is taxable, paid gross, twice yearly
  • Free of CGT
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

Stock dividend

What is it?

A

Company offers shareholders the choice of receiving new shares instead of a cash dividend

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

Interest yield

What is it?

What is it also know as?

A

Looks at income

Income yield, running yield, flat yield

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

Interest yield

Calculation?

A

Annual coupon /clean price x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

Gross Redemption Yield

What is it?

A

Measure of the rate of return offered by an investment up until the date it matures i.e. overall return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

Gross Redemption Yield

Equation?

A

Interest yield + Gain or loss to maturity divided by number of years to maturity / clean price x 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

Gross Redemption Yield

Doesn’t take into account?

A

Individual’s tax position - most investors target bonds for income rather than overall return

To calculate overall return - tax, need to calculate net redemption yield

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

Cum dividend

What is it?

If owned for less than the whole period?

A

Full 6 months interest received

If sold purchaser must compensate buyer for interest occured but not received

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

Ex-dividend

What is it?

If purchased after that?

A

Interest payments usually made 7 working days before payment date

Price for buyer lower than this

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

Dirty price

What is it?

A

Clean price +/- interest adjustment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

Bond prices

Adjusted for? (7)

A
  • Income need/want
  • Credit rating of issuers
  • Future interest rates trends
  • Changes to inflation
  • Government finances conduct
  • International and soci-political tensions
  • Attraction of other assets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

Bonds

Risks? (5)

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

Bonds

Yield curves - explain? (3)

A
  • Normal - greater return in exchange for greater risk as greater exposure to risk
  • Flat - stable economy
  • Inversion - Expectation of increasing interest rates followed by falling interest rates
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

Corporate Bonds

Riskier?

Bid/ Offer spread?

Yields?

A

Riskier than gilts as greater chance of default, more volatile

Bid Offer spread is greater

Yields are higher than gilts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

Corporate Bonds

Can be either………..or………………?

Explain?

A

Secured - charge is taken over firm’s assets and in the event of default assets used to pay loan

Unsecured - rank alongside normal creditors, higher yield

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

Corporate Bonds

Charge?

2 types?

A

Established by trust deed

Secured by fixed (secured to fixed asset of company, therefore sale of asset is restricted) or floating charge (general charge over companies assets)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

Equities

For companies to issue shares to publish? (2)

A
  • Must be listed on stock exchange
  • 25% minimum for sale
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
64
Q

Equities

Why list on AIM? (2)

Regulated by?

A
  • Main market listing is expensive
  • Many rules

UK Listing Authority (UKLA)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
65
Q

Ordinary Shares

What are they? (3)

A
  • Confer an ownership stake in a company
  • Represent the risk capital, are the last to be paid out in the event of liquidation
  • Holders have a right to share in the profits of the company (through dividend payments), a right to attend and vote at company meetings
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
66
Q

Ordinary Shares

Why keep profits back?

A

Profit held back to increase the value of the company therefore increase value of shares - capital growth for investors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
67
Q

Ordinary shares

Other types? (2)

A

Non-voting ordinary shares

Deferred ordinary shares - don’t receive a dividend until pre-determined level reached/ specific period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
68
Q

Preference shares

Characteristics? (3)

A

Fixed annual dividend - every 6 months and only paid if profit made

Typically no voting rights unless company falls behind on dividend payments

Paid before dividends to other stakeholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
69
Q

Preference shares

Risks? (8)

A
  • Equity capital risk
  • Market risk
  • Share dividend volatility
  • Liquidity
  • Currency
  • Counterparty risk
  • Regulatory
  • Fund managers and insurance companies
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
70
Q

Preference shares

Types? (5)

Explain

A
  • Cumulative - any missed dividend made up in future years
  • Non-cumulative - any missed dividend doesn’t need to be made up
  • Participating - fixed rate dividend paid and participate in ordinary share dividend as well
  • Redeemable - temporary source of finance, dividends paid until company repurchases shares
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
71
Q

Stamp duty

When is stamp duty payable and at what rate?

A

Payable when paper transaction of shares

0.5% of value of share (rounded up to nearest £5)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
72
Q

Stamp duty

Who pays it?

A

The purchaser

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
73
Q

Stamp duty

What is it not paid on? (5)

A
  • AIM
  • UK domicilied ETFs
  • If < £1,000
  • Gilts/ corporate bonds
  • OEICS/ unit trusts
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
74
Q

Stamp duty

What is stamp duty reserve tax paid on?

How is it rounded off?

Who pays it?

A

Paid on paperless transactions of shares on CREST

Rounded to the nearest penny

Paid by the stockbroker on behalf of the purchaser

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
75
Q

Stamp duty

For CGT?

A

Stamp duty and stamp duty reserve tax can be deducted

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
76
Q

Stamp duty

PTM levy is payable on? (3)

A
  • Listed shares
  • Investment trusts
  • REITS
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
77
Q

Factors affecting share prices? (7)

A
  • Economic
  • Polictical
  • Investor sentiment
  • Profit expectations
  • Dividend expectations
  • Takeover activity
  • Quality and track record of management
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
78
Q

Private equity

What is it?

Typically refers to provision of? (2)

A

Acquiring shares/ stake in a company not traded on stock exchange

  • Venture capital
  • Management buy-outs/ buy-ins
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
79
Q

Private equity

Private equity firms looks to make capital gain by? (4)

A
  • Selling shares back to management
  • Selling shares to another investor
  • Trade sale - company-company
  • Floated on stock exchange
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
80
Q

Private equity

Can invest in private equity through? (3)

A
  • Funds - typically hold shares for 3-7 years, aim to return original investors money and any additional returns. Have the potential for high returns but high risk
  • Listed private equity companies - invest directly into unlisted companies. Invest in funds that invest in unlisted companies
  • EIS, SEIS & VCTs
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
81
Q

Equity Investment Ratios

Earnings per share (EPS)

Formula?

A

Profit after tax LESS preference dividends

DIVIDED BY

Number of ordinary shares in issue

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
82
Q

Earnings per share (EPS)

Characteristics (4)

A
  • Shows trend in company’s profitability
  • Widely used in company performance analysis - usually only compare companies rather than sectors
  • All companies list EPS
  • Result shows amount per share in pence that the company has earned during the year
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
83
Q

Dividend yield

Formula?

A

Net dividend per share

DIVIDED BY

Current share price

MULTIPLE BY 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
84
Q

Dividend yield

Characteristics? (3)

A

Shows true value of share’s dividend

Same as interest yield on bonds

Not necessarily a reliable indicator as dividend and share price fluctuate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
85
Q

Dividend cover

Formula for total basis?

A

Earnings per share

DIVIDED BY

Dividend per share

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
86
Q

Dividend cover

Formula for individual basis?

A

Profit attributed to ordinary shares

DIVIDED BY

Dividend paid to ordinary shareholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
87
Q

Dividend cover

What does the formula show?

The higher the figure shows?

A

How many times the dividend could be paid out of available current earnings

If figure is really high this shows profits being maintained rather than shared

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
88
Q

Dividend cover

Uncovered dividends?

A

If company draws on reserves to pay dividend

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
89
Q

Price Earnings Ratio (P/E)

Formula?

A

Current share price

DIVIDED BY

Earnings per share

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
90
Q

Price Earnings Ratio

If the formula produces a high figure what does this mean?

What can it be used for?

A

Better as more shares in demand

A comparison between companies in same sector

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
91
Q

Net Asset Value (NAV)

Formula?

A

Total capital employed

LESS

Claims + loans + preference shares

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
92
Q

Net Asset Value (NAV)

Measures?

A

Amount available to shareholders if the company were to close down, sell all its assets and distribute balance. Value of tangible assets attributable to ordinary shares

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
93
Q

Net Asset Value (NAV)

Useful for?

A

Takeover bid and liquidation - compare bid price to NAV

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
94
Q

Investment ratios

What are their limitations? (3)

A
  • Differing accounting policies can be used to calculate profits so difficult to compare
  • Management can change accounting period
  • Ratios use historical data therefore no guide to future performance
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
95
Q

Property

Demand is driven by?

A

Changing economic circumstances and desire to move

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
96
Q

Residential property investment

What is it?

A

Buying a property with the express priority of letting it out for income or selling it at a profit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
97
Q

Residential property investment

Risks? (3)

A
  • Liquidity risk - initial cost
  • Management risks - need to run property, agency fees
  • Void risk - if property is vacant and no rent
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
98
Q

Residential property investment

Choosing a property? (4)

A
  • Location
  • Tenants
  • Age and condition of property
  • Diversification - buying more property
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
99
Q

Rental yields

What is the headline gross rental yield formula?

What should price include?

A

Yearly rental income

DIVIDED BY

Purchase price of home

MULTIPLIED

100

Price should include any expenses of purchase

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
100
Q

Rental yields

What is the net rental yield formula?

What is the difference between the two yields?

A

Yearly rental income LESS letting expenses

DIVIDED BY

Original purchase price PLUS charges

MULTIPLIED

100

Net yeild is after any letting expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
101
Q

Stamp Duty Land Tax

Due on?

Must be paid within?

A

Individuals who purchase land

Due within 14 days of effective date of transaction i.e. completion date/ date of payment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
102
Q

SDLT

Non-residential rates?

Paid via?

A

£0 - £150,000 = 0%

£150,000 - £250,000 = 2%

> £250,000 = 5%

Paid via self assessment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
103
Q

SDLT

Is it charged on leasehold property?

Is it charged on additional properties?

A

Charged at 1% on present value of rent over lease term if value > £125,000 for residential or > £150,000 for non-residential

If you’re buying a second home, you’ll still pay Stamp Duty on a property costing more than £40,000 at the normal rates – plus surcharge of 3%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
104
Q

Net Present Value (NPV)

Formula for calcuating SDLT on leasehold property?

A

Annual rent

MULTIPLED BY

Lease term

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
105
Q

Property income allowance

What is it?

A

If rental income is lower than £1,000 don’t need to be declared to HMRC

If rental icome is greater than £1,000 can deduct allowance from gross rent rather than deducting expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
106
Q

Non-residential

What type of property is classed as non-residential? (5)

A
  • Commercial property
  • Agricultural land
  • Forests
  • Any other land or property not used as residence
  • 6 or more residential properties bought in a single transaction
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
107
Q

Rent a room relief

What is it?

CGT payable?

A

Income from renting a furnished room in your main residence up to £7,500 tax free or £3,750 per person if joint

If yearly rental is greater than £7,500 can either be taxed on excess over £7,500 but no expenses or normal basis income less expenses

No CGT payable as main residence

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
108
Q

Rent a room relief

If rental received exceeds linit of £7,500?

A

If yearly rental is greater than £7,500 can either be taxed on excess over £7,500 but no expenses or normal basis income less expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
109
Q

Rent a room relief

Conditions? (3)

A
  • Must be in UK
  • Doesn’t apply to self contained unit or unfurnished
  • Must not be used as a residence i.e. an office
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
110
Q

REITS

What are they?

A

Closed ended companies listed on stock exchange

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
111
Q

Real Estate Investment Trust (REITS)

Conditions? (5)

A
  • 75% of assets and gross profits must be in investment property
  • Income must cover gearing by 125%
  • 90% of rental profits must be paid as dividends within 12 months of end of accounting period
  • Listed on recognised stock exchange
  • At least 3 properties and held for 3 years
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
112
Q

REITS

How are they taxed?

  • ring-fenced (RF)?
  • non ring-fenced (NRF)?
A

Ring Fenced:

Within Fund: Exempt from corporation tax

Income: Property income paid net of 20%, can reclaim if non tax-payer

CGT: Fully liable

Non-Ring Fenced

Within Fund: Subject to corporation tax

Income: Dividend income, usual dividend rules

CGT: Fully liable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
113
Q

PAIF

What is it?

A

Property authorised investment fund, is an OEIC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
114
Q

Commercial property

Types? (3)

A
  • Retail - lowest yield
  • Office building - most competition in terms of supply
  • Industrial property - higher yields
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
115
Q

Commercial property

Characteristics? (5)

A
  • Move in different ways to equities - good for diversification as often invest in all 3 types
  • More secure income as longer leases - residential 6-12 months; commercial 10 years
  • Valuation - multiple of rent
  • Values cyclical - rent paid every 3-5 years
  • Usually pass insurance and maintenance costs to tenant
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
116
Q

Commerial property

Drawbacks? (5)

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
117
Q

Alternative investments

Examples?

A

Art, commodities, collectables

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
118
Q

Alternative investments

Drawbacks? (6)

A
  • Don’t produce income
  • Heavily reliant on investor sentiment - need to be an expert
  • Often cost money to upkeep - e.g. repair, insurance premiums
  • Limited supply and fluctuating demand
  • Price between buying and selling can be higher
  • Authenticity important
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
119
Q

Commodities

Hard and soft?

A

Hard: typically mined e.g. oil, gold, precious stones

Soft: typically grown e.g. coffee

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
120
Q

Commodities

Why do they make a good investment?

A

Low correlation with other assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
121
Q

Commodities

Invest in commodities through? (3)

A
  • Companies that produce commodities
  • Funds thta invest in commodities
  • Exchange Traded Commodities (ETCs)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
122
Q

Cryptocurrencies

What is blockchain and mining?

A

Digital ledger processing transactions using encryption technology

Computer accounting solving math problems

Confirms transaction is legit

Creates new digital currencies - pays miners with % of transaction fee charged to user

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
123
Q

Blockchain and mining

Other details? (3)

A
  • Transactions annoymous
  • Not regulated by FCA
  • Not backed by government or central banks
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
124
Q

Indices

What are they?

A

Shows the way markets have moved over time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
125
Q

Indices

Are used to what? (2)

A
  • Compare a share with performance of sector or market
  • Compare performance of fund manager with market
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
126
Q

Indices

Performance of portfolios can be measured against? (3)

A
  • An index reflecting whole market
  • Largest companies/ smaller companies
  • Particular sectors
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
127
Q

Indices

What are they weighted on?

  • impact of larger companies?
A

Market capitalisation

Larger companies impact the index more

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
128
Q

Free float adjustment

What is it?

A

Free float of stock equals the portion of shares available for trading therefore weighting of company with lower than 75% shares available are adjusted for free float

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
129
Q

Indices

Limitations? (3)

A
  • Can be heavily impacted by larger companies
  • Not as good as fundamentally weighted index - weighted on revenue, earnings, employees and dividends
  • Ignores dividends, costs of buying and selling, CGT and management expenses
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
130
Q

The macro economic environment

Greater Good theory?

Therefore overestimate and underestimate leads to?

A

Buying assets as expect prices to continue to rise - bubbles

Overestimate expected returns and underestimate competitive pressures leads to excess liquidity in markets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
131
Q

The macro economic environment

Why can the government no longer use interest rates effectively?

Government must use what instead?

A

Interest rates are so low

Government use fiscal policy instead

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
132
Q

The macro economic environment

What does government policy affect? (5)

A
  • Interest rates and currencies
  • Business and competition
  • Economic cycles and inflation
  • International relations - greater inportnace due to globalisation
  • Elections - ease policy to increase votes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
133
Q

Socio-economic challenge

What is it? (3)

A
  • People are living longer - more people at retirement, strain on, services investment markets and state pension
  • Birth rates are declining
  • Ageing population and workforce - increased strain on financial services and healthcare
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
134
Q

Socio-economic challenge

Technology

What has this meant? (4)

A

Fast growing industries

  • Mobile communications
  • Mew generation of digital metrics
  • Increased globalisation - lead to investment in foreign markets and low skilled workers competing with developed countries
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
135
Q

6 stages of economic cycle?

What are they?

How does it affect demand, inflation, interst rates, unemployment in each case?

A
  • Boom
  • Slow down - falling demand, increase interest rates and inflation and increase in unemployment
  • Recession - falling demand, profits and output, lower interest rates, inflation and increase in unemployment
  • Bust
  • Recovery - Increased demand, lower inflation and interest rates, equity growth increases as interest rates low
  • Acceleration - increase demand, inflation and interest rates
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
136
Q

GDP

What is it and when is it measured?

What does a change in GDP help to show?

A

Total value of goods and services produced each year measured quarterly

Show where company is on business cycle

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
137
Q

PSNCR

What does it stand for?

A

Public Sector Net Cash Repayment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
138
Q

PSNCR

What is it?

What does it indicate - how is this impacted by a boom or recession?

A

Difference between government spending and revenue

Indicates how much the government need to borrow - higher in recession and lower in a boom

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
139
Q

Bank of England

What does it set?

A

Base rate - rate C

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
140
Q

Bank of England

When do changing interest rates have the largest impact?

A

18 months - 2 years after change therefore Bank of England targets future rather than present inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
141
Q

Interest rates

If interest rates are low what impact does this have on fixed interest and property?

A

Increases asset prices for fixed interest and property

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
142
Q

Balance of payment

What is it and how is it measured?

A

(BOP) is an accounting of a country’s international transactions for a particular time period. Any transaction that causes money to flow into a country is a credit to its BOP account, and any transaction that causes money to flow out is a debit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
143
Q

Balance of payments

UK has a what?

A

Trade Gap M > X

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
144
Q

Balance of payments

Made up of? (2)

A
  • Current account
  • deals with X, M, interest, dividends & rent
  • Visible trade (goods) and invisible trade (tourism)
  • divided into trade in goods and services, investment income and transfer payments
  • Capital account
  • foreign investments and loans in UK and abroad
  • If overdrawn Bank of England reserves used to finance it
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
145
Q

Money Supply

Made up of? (4)

Includes?

A
  • Narrow Money - M0 = level of notes and coins in circulation + banks operational balances at the Bank of England
  • Broad money - M4 = money supply is defined as a measure of notes and coins in circulation (M0) + bank accounts (deposits created by banks and BS through lending activities and savings deposits
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
146
Q

Money suppply

What does it indicate?

A

Economic situation and changes in economic cycle

E.G. Rising interest rates indicates lower demand for money

E.G. Rising M4 indicates higher demand for loans, rapid increase may indicate rising inflation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
147
Q

Money supply

How can the Bank of England influence money supply?

How does this work?

A

Selling/ purchasing treasury bills/ gilts

E.G. to lower money supply sell securities at attractive rates - money being removed from circulation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
148
Q

Inflation

4 types?

A
  • RPI
  • CPI
  • CPIH - CPI and includes owner occupiers housing costs
  • RPIY - RPI, excludes mortgage interest payments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
149
Q

Inflation

What is disinflation?

What is deflation?

A

Disinflation - reduction in rate of inflation

Deflation - when inflation turns negative

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
150
Q

Inflation

Expectation of increased inflation leads to? (2)

A
  • Reduction in price of future interest
  • Reduction in value of equities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
151
Q

Interest rates

Rising interest rates leads to? (4)

A
  • Higher return on cash based deposits
  • Reduction in price of fixed interest, higher yield for new bonds which leads to increase value of £
  • Reduced equities as increase in cost of borrowing
  • Increase foreign investors due to increased value of £
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
152
Q

Modern Portfolio Theory

What is it? (3)

What is the best portfolio to provide high returns with least amount of volatility?

A
  • Maximise returns and minimise risk
  • Investors are risk averse
  • Diversified portfolio of imperfectly correlated asset classes can reduce risk through lower volatility

Imperfectly correlated asset classes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
153
Q

Standard deviation

What does it measure?

A

How far from the average expected return an investment performs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
154
Q

Standard deviation

For investors what does standard deviation mean?

A

How widely the actual return on an investment varies around its average/ mean return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
155
Q

Standard deviation

What is the normal distribution of data?

A

The return expected to fall within one standard deviation of the average return 68% of the time and within two standard deviations 95% of the time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
156
Q

Diversification

What is it?

A

Holding a range of imperfectly correlated asets in a portfolio to smooth out fluctuations caused by economic and financial events

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
157
Q

Reduction of risk

Can reduce the risk on portfolios by? (2)

A

Diversification

Hedging - taking a position where if one asset value falls another one increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
158
Q

Diversification

How does it impact systemic and systemic risk?

A

Lowers systemic risk but not systemic risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
159
Q

Diversification

Is achieved by? (3)

A
  • Holding different asset classes
  • Companies in different sectors
  • Overseas companies
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
160
Q

Correlation

3 types?

A
  • Positive correlation - profits and share values move in same direction
  • Negative correlation - profits move in appropriate direction to values
  • No correlation - profits and shares have no relationship
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
161
Q

Efficient frontier

To plot efficient frontier need to know? (3)

A
  • Return of each investment
  • Standard deviation of each assets return
  • Correlation between assets return
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
162
Q

Efficient frontier

What are the limitations?

A
  • Assumes investment returns follow normal distribution pattern
  • Standard deviation correct level of risk?
  • Doesn’t factor in e.g. ethical preferences
  • Works on historial data
  • Doesn’t take into account charges - transaction costs
  • Assumes underlying funds are index funds
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
163
Q

Non-systemic risk

What is it and what is it independent of?

A

Investment specific risk - risk that affects a particular company

Independent of economic, social and policitical factors e.g. new competitor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
164
Q

Non-systemic risk

How many securities needed to eliminate most of non-systemic risk?

A

Need 15-20 randomly selected securities - however the rate of risk diminshes the more securities are added

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
165
Q

CAPM

What does it stand for?

A

Capital Asset Pricing Model

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
166
Q

CAPM

Definition?

A

To consider a riskier asset an investor would want a return that is equal to the risk-free return plus a risk premium for taking on the additional risk of that asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
167
Q

CAPM

What is normal risk-free return?

A

Usual return you would get in cash / 91 day treasury bills

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
168
Q

CAPM

Measures?

Expressed?

A

The riskiness of a security by comparing it to the market

Expressed in terms of its beta ß

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
169
Q

Beta ß

Definition?

A

The market has a beta of one, and the beta of an individual security reflects the extent to which the security’s return moves up or down with the market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
170
Q

Beta ß

If security has ß of 1?

A

Has matched market historically - if market moves by 10%, the security’s price will be expected to also move by 10%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
171
Q

Beta ß

A security with ß more than one?

A

Exaggerates market movement and is more volatile than the market - by how much depends on the ß - aggressive securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
172
Q

Beta ß

Security with ß less than one and more than zero?

A

Usually more stable than the market, move less than the market but in the same direction - defensive securities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
173
Q

CAPM Equation

Equation?

A

E(Ri) = Rf + ßi (Rm – Rf)

E(Ri) is the expected return on the risky investment;

Rf is the rate of return on a risk-free asset;
Rm is the expected return of the market portfolio;
ßi is the measure of sensitivity of the investment to movements in the overall market;
(Rm – Rf) is the market risk premium, the excess return of the market over the risk-free rate; and ßi (Rm – Rf) is the risk premium of the risky investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
174
Q

CAPM

Assumptions? (6)

A
  • All investors have an identical holding period
  • Many buyers and sellers
  • No taxes / short selling restrictions
  • All info available
  • Liquidity ignored - quantity of risky securities fixed in market
  • Investors can borrow at risk free rates and make decisions based on risks and return alone
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
175
Q

CAPM

Limitations? (3)

A
  • Finding risk free rate difficult
  • Choosing market portfolio can be difficult as ß varies - typically uses FTSE 100
  • ß assured to be stable and calculated on historical data
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
176
Q

Multi factor models

A further limitation of CAPM?

A

Only concerned with security’s sensitivity to market therefore single factor model

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
177
Q

Multi factor models

What are they?

A

Attempts to describe security returns as a function of a limited number of factors - adds to risk premium for each sector

E(Ri) = Rf + ßGDP (risk premium GDP) + ßIR (risk premium IR) = minimum return + risk premium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
178
Q

Multi factor models

What is Fama and French model?

Findings? (2)

A

Add factors for company size and value

  • Small cap stocks tend to outperform large cap stocks
  • Value stocks tend to outperform growth stocks
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
179
Q

Arbitrage pricing theory (APT)

What is it?

A

A security’s return can be predicted using the relationship between the security and a number of common risk factors - sensitivity to changes in factor is represented by a factor - specific ß

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
180
Q

Arbitrage pricing theory

If price diverges?

A

Abritrage activities should bring it back in line so not possible for a security to yeidl better returns than indicated by its sensitivity to the various factors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
181
Q

Arbitrage pricing theory

What is arbitrage?

A

Practice of taking advantage of security mis-pricing to make a risk-free profit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
182
Q

Arbitrage pricing theory

How does it differ to CAPM? (2)

A
  • Belief that asset prices determined by more than one type of market risk
  • Each investor holds a unique portfolio rather than identical portfolios
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
183
Q

Arbitrage pricing theory

Limitations? (3)

A
  • APT is general - doesn’t tell us which factors are relevant
  • Number and nature of factors likely to change over time and between economies
  • Also need to calculate multiple betas
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
184
Q

Multi-factor models

Characteristics of all? (2)

A
  • Investors require extra return for taking risk
  • Pre-dominantly concerned with risk that can’t be eliminated by diversification i.e. systemic risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
185
Q

Arbitrage pricing theory

Factors that influence security returns? (4)

A
  • Unanticipated inflation
  • Change in expected level of industrial production
  • Change in default risk premium on bonds
  • Unanticipated change in return of long term government bonds over treasury bills (shifts in yield curve)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
186
Q

EMH

What is it? (3)

A

Efficient market hypothesis

  • Share prices move based on info such as profits
  • Share price you see equals fairest price
  • Not possible to outperform market by choosing undervalued shares because market reacts before investors
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
187
Q

EMH

Buying and selling shares is more about….?

A

Chance than skill

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
188
Q

EMH

Favours what funds?

A

Tracker funds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
189
Q

EMH

3 forms?

How do they differ?

A

Same premise but different level of info available:

  • Weak-form efficiency - curernt share price fully reflects all past price and trading info
  • Semi-strong efficiency - share prices adjust to all publicly available info, done rapidly and unbiased (all past-trading info, accounts and other economic factors)
  • Strong-form efficiency - share price reflects all public and private info, including insider trading
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
190
Q

Behavioural finance

What is it?

A

Aims to explain market anomalies not explained by traditional finance models

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
191
Q

Behavioural finance

They believe?

A

Psychological factors, behavioural biases affect investors therefore investors are irrational - as shown by bubbles and crashes

Differ from MPT and EMH that say investors are rational

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
192
Q

Prospect theory/ loss aversion

What is it? (2)

A
  • Investors more distressed by a loss than they are pleased by the same level of gain
  • People play safe when protecting gains but often take riskier decisions aimed at loss aversion e.g. reluctance to realise a loss therefore hold onto a losing investment for too long hoping it will make a gain - avoiding feeling of regret
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
193
Q

Overconfidence and over and underreaction

What is it? (3)

A
  • Investors overestimate their own skills and predictions - leads to bubbles and underestimate the likelihood of bad outcomes
  • More optimistic when market goes up and more pessimistic when markets go down
  • Often give too much weight to recent experience which often run contrary to long-run averages
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
194
Q

Criticisms of behavioural science

What are they? (3)

A
  • Can’t predict the effect on the market of human behaviour
  • No doubt this impacts investors but hard to/ cannot be quantified
  • Only look at anomalies which will eventually be priced out of the market
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
195
Q

The time value of money

Key concepts? (2)

A
  • Money received now is more valuable than money received in future years
  • A rate of interest received monthly is more valuable than the same rate of interest received quarterly/ annually
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
196
Q

Time value of money

Key terms and definitions - PV?

A

Present value (PV) - amount of capital invested today, known as principal

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
197
Q

Time value of money

Key terms and definitions - n?

A

Time period (n) - time period capital is invested - The number of time periods interest is paid denoted by n, e.g. if paid twice a year, n = 2, quarterly, n = 4

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
198
Q

Time value of money

Key terms and definitions - r?

A

Interest rate (r) -quoted as a %, expressed as a decimal, r. e.g. interest rate of 7% is written r = 7 ÷ 100 = 0.07

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
199
Q

Time value of money

Key terms and definitions - FV?

A

​Future value (FV) - accumulated value of an amount of money invested for n time periods, at a rate of interest r

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
200
Q

Time value of money

FV calculation?

A

The basic formula for calculating compound interest is:

FV = PV (1 + r)n

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
201
Q

Time value of money

EAR formula?

A

Effective Annual Rate - takes into account the interest rate if compounded more than once a year

(1 + r/n) n - 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
202
Q

Interest payable at more frequent intervals

Difference between EAR/ APR/ AER?

A

No difference in formula

EAR used for loans and deposits

APR (annual percentage rate) used for loans

AER (annual equivalent rate) used for deposits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
203
Q

Interest payable at more frequent intervals

What if compounded monthly rather than annually?

A

n increased by number of times compounded e.g. 12 for monthly in 1-year or 24 for monthly in 2-years

r is decreased by n

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
204
Q

PV

How do you calculate - i.e. what amount has to be invested now to receive x in ..yrs?

A

PV = FV/ (1 + r) n

annual interest = number of times compounded in year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
205
Q

FV

Formula to calculate FV if regular investment?

A

FV = P ((1 + r)n - 1 / r)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
206
Q

FV

What is a discounted cash flow useful for?

Basic formula?

A

Calculate PV of an investment’s future cash flow to arrive at a fair value for current price

Calculating PV of FI

PV = FV/ (1 + r) n

where PV is present value of cash flow

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
207
Q

Theoretical price of a bond

Calculate?

Annual coupon = 6.5%

PAR in 2 years = £100

IR = 5%

A

PV = £6.50/(1+ 0.05)1 + £106.50/ (1+ 0.05)2

PV = £6.19 + £96.60

Therefore, the theoretical present value of the bond = £102.79.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
208
Q

Annuity

What is it?

A

The sum of money needed now to make regular payments and interest over fixed term at fixed interest rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
209
Q

Annuity

Formula?

A

A = P (1 - (1 + r) - n / r

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
210
Q

Real Returns

Formula?

A

The real return is approximately the nominal return from an investment minus the inflation rate:

RREAL = RNOM – RINF
where:
RREAL is the real return;
RNOM is the nominal return;

RINF is the inflation rate.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
211
Q

Assessing risk

Inflation particularly bad for? (2)

A
  • Cash deposits
  • Fixed interest
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
212
Q

Inflation risk

Causes of inflation? (11)

A
  • expanding money supply
  • bottlenecks in production cause prices to rise and imports to flood into the economy
  • the government and the financial markets respond with rising interest rates
  • cuts in public expenditure, as well as tax increases to dampen down demand
  • the economy enters recession and prices steady, or perhaps fall, as the supply of goods and services exceeds economic demand.
  • Some cycles are further exacerbated by external events such as:
  • war or shortages;
  • prices of imported goods rising as overseas countries experience inflation and commodity prices also increase
  • currency devaluation
  • high wage demands, which can be affected by trade union policies
  • Investor sentiment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
213
Q

Interest rate risk

Mainly effects?

A

Fixed interest securities - sensitive to the rises and falls in interest rates. When Interest rates fall, bond holders capital value will rise and when interest rates rise, capital value will fall, as investors can get greater returns elsewhere

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
214
Q

Interest rate risk

How can a bond manager lower interest rate risk?

A

By holding shorter dated stock / cash

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
215
Q

Interest rate risk

Factors affecting interest rate moves? (5)

A
  • Economic cycle
  • Fiscal policy - issuing gilts will push up long term yields
  • Monetary policy - QE reduces short term rates
  • Inflation - expectations
  • Preference for liquid securities - in uncertain times prefer instant access
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
216
Q

Credit risk

Maninly affects what?

A

Bonds and cash deposits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
217
Q

Credit risk

4 types?

A
  • Default risk
  • Downgrade risk - credit rating lowered
  • Credit spread risk - gap between yields of gilts and corporate bonds get wider due to lack of confidence in corporate bonds - concern they can’t service their debt
  • Counterparty risk - a counterparty will not pay what it is obliged to
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
218
Q

Currency risk

What is it?

A

Investment made overseas / in a foreign company profits impacted by change in exchange rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
219
Q

Liquidity risk

What is it?

A

Property and private equity vulnerable and may have to sell assets at a discounted price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
220
Q

Event risk

What is it?

A

E.G. Natural disasters

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
221
Q

Political risk

What is it?

A

Changes in government / unrest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
222
Q

Operational risk

What is it?

A

Internal errors in company

e.g. reporting error, fraud, regulatory risk, systems failure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
223
Q

Bail-in risk

What is it?

A

Where financial assistance comes from existing capital base e.g. the institution’s shareholders, bondholders and depositors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
224
Q

Diversification

Advantages of diversifying a portfolio? (4)

A
  • Reduces the risk of one investment
  • Spreads the opportunity for potential return across asset classes
  • Minimises risk of the overall portfolio suffering downturn
  • Increases possibility of stable returns through all economic cycles
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
225
Q

Gearing

What is it?

What does it magnify?

A

Borrowing money in a client’s portfolio with objective of increasing exposure to other assets

Magnifies positive and negative portfolio returns

Remember - borrowing costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
226
Q

Collective Invesments

Are popuar because? (6)

A
  • Invest small sums of money, because the investor’s cash can be ‘pooled’ into a much larger fund
  • Professional fund managers make the underlying investment decisions
  • Investor can achieve a balanced portfolio with spread of investments
  • Offer the ability to pursue particular objectives or specialise
  • Investor’s risk is reduced by the wide spread of investments in the underlying portfolio
  • Lower dealing costs
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
227
Q

Collective investment schemes

Total of everyone’s shares must equal?

A

Must equal NAV - Net Asset value - total value of assets held

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
228
Q

Unit trusts and OEICs

Characteristics? (4)

A
  • Investor participate in a large portfolio of shares
  • Units or shares, each unit representing a small but equal fraction of a portfolio of perhaps 50 or 100 different shareholdings
  • Assets of a unit trust are held for investors by trustees, invested by managers, whereas the assets of an OEIC are held by an independent depositary
  • Initial charge, which covers setting up costs and also an annual management fee. If no initial charge, an exit charge may be applied
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
229
Q

Unit trust and OEICs

OEIC and UT are protected by?

A

OEIC: independent depository therefore protected by company law and depository

UT: protected by trust deed and trustees

Both: protected by FCA and FSCS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
230
Q

Unit trusts and OEICs

IA categories broad sectors? (4)

A
  • Capital protected
  • Income
  • Growth
  • Specialist
  • Targeting an outcome
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
231
Q

Unit trusts and OEICs

To be included in IA sector must have and performance is measured by?

A

Must have at least 80% or more of its assets invested in the relevant sector

Income fund must achieve a yield of not less than 90% of the relevant index

Performance measurement companies such as Lipper or S&P

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
232
Q

Unit trusts

Constituted by?

A

Signing a trust deed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
233
Q

Unit trusts

Who are trustees? (2)

A
  • Large banks / insurers
  • Must be independent of management group
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
234
Q

Unit trusts

Trustee roles? (5)

A
  • Must report issues if unhappy with how fund managed
  • Audit fund
  • Issuing info to unit holders who must be registered
  • Arrange meetings of unit holders
  • Distribute income
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
235
Q

Unit trusts

Register must contain? (3)

Can it be closed?

A
  • Name and address of unit holder
  • Number of units held
  • Date unit holder registered

Can be closed mo more than 30-days per year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
236
Q

Unit trusts

Main role of the fund manager in return for…?

A

To manage fund in return for AMC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
237
Q

Unit trusts

Manager’s duties? (5)

A
  • Authorised person
  • Adequate financial resources
  • Manage assets according to regulations, the trust deed and scheme particulars
  • Supply information to the trustee
  • Maintain a record of units for inspection by the trustee
  • Notify the trustee and/or the FCA if breach in rules
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
238
Q

Unit trusts

How is fund taxed?

A

Do not pay tax on capital gains nor income or gains derived from options or futures

Corporation tax - allowable expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
239
Q

Unit trusts

Internal fund taxation - income if equity and if non equity?

A
  • Interest and rental income are subject to corporation tax at a special rate of 20%.
  • Dividends are received as franked investment income and flow through to dividend distributions payable by the unit trust with no tax liability.
  • Foreign dividends may have had tax deducted at source (withholding tax), which may not be reclaimable.
  • Funds that distribute interest rather than dividends can deduct the interest as an expense for corporation tax purposes to ensure there is no double taxation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
240
Q

OEICs

Authorised as?

To comply with regulations must be? (2)

A

Investment companies with variable capital (ICVCs)

Incorporated and authorised

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
241
Q

OEICs

Fund manager is know as?

A

ACD - Authorised Corporate Director

242
Q

OEICs

ACD is responsible for? (4)

A
  • OEIC compliance and protection
  • Preparation of accounts
  • Register of shareholders
  • Day to day management
243
Q

OEICs

Operated by Independent depository - role? (4)

A
  • Valuation, pricing and dealing
  • Keeping ACD in check
  • Collection of income
  • Safekeeping assets
244
Q

OEIC vs Unit trust

Structure - similar?

Disadvantages? (2)

A

Both open-ended

  • If multiple people want to sell may have to sell positions
  • If fund grows too much and can’t cope
245
Q

OEIC vs Unit trust

Differences? (2)

A
  • OEIC - limited company and issues shares, has one constitutional document and holds AGM - annual audited accounts, cost of creation may be met by fund
  • Unit Trust - Trust structure and issues units - must be approved by meeting of unit holders. If it wants to increase charges must give 60 days notice
246
Q

OEIC vs Unit trust

Contribution similariities? (2)

A
  • Both accept minimum and maximum
  • Both accept single and regular
247
Q

OEIC vs Unit trust

For large contributions OEICs have?

A

Dilution levy - levy if large investor makes money and then leaves - ensures charging is fair for all

248
Q

OEICs vs Unit trusts

What is equalisation for unit trusts?

A

When a unit is bought it includes income accrued from previous distribution up to date of purchase

249
Q

OEICS vs Unit trusts

What makes up a unit trusts first distribution?

A

Income accrued from date of purchase plus equalisation payment

250
Q

Unit trusts

How is equalisation payment taxed?

A

Represents a partial refund of capital invested so no income tax but deducted from purchase price to identify acquistion cost for CGT

251
Q

Unit trusts

Aim of equalisation payment? (2)

A
  • Fairness between unit holders
  • Allow same price per unit dividend payment to all unitholders
252
Q

Unit trusts

Income tax on dividend distributions from equity unit trusts?

A

First £2,000 of dividend income in 2020/21 is tax free. Sums above that will be taxed at the following rates:

  1. 5% for basic-rate taxpayers;
  2. 5% for higher-rate taxpayers; and
  3. 1% for additional-rate taxpayers.

Taxpayers must use self-assessment to pay any tax due

253
Q

Unit trusts

Taxation of dividend distribution from equity fund paid to trustees? (2)

A

Trustee is liable to tax at 38.1%

£2,000 tax-free dividend allowance does not apply, although dividends that fall within the standard band of £1,000 will only be taxed at 7.5%

254
Q

Unit trusts

Income tax on distributions from non-equity unit trusts? (2)

A
  • Paid gross
  • Under PSA, BRT can earn £1,000 in savings income tax free, HRT £500, additional rate no allowance
255
Q

Unit trusts

Income tax on distributions from non-equity unit trusts - Trustees? (2)

A
  • Income tax at 45%
  • First £1,000 (standard rate band) taxed at 20%
256
Q

Unit trusts

Income tax if reinvestment of dividends and interest?

A

Still counts as income for the investor, so same tax treatment as dividend that is distributed

257
Q

Unit trusts

Capital gains tax for investor? (3)

A
  • Capital gains may be payable on any profits on disposal
  • Losses can be offset
  • Annual exemption
258
Q

OEICs & Unit trusts

If umbrella fund with sub-funds, is a fund switch taxed? What is exempt from this?

A

A switch from one sub fund to another is a disposal for CGT

FOF exempt

259
Q

OEICs vs Unit trusts

Advantages of OEICs? (4)

A
  • OEICs more EU friendly for operating and marketing in EEA
  • More flexible charging structure as can invest in multiple share classes
  • Easier to run under umbrella structure e.g. platform
  • Easier to create new funds - wider fund choice
260
Q

Multi-manager funds

Types? (2)

A
  • Fund of Funds (FOF)
  • Manager of Manager (MOM)
261
Q

Multi-manager funds

Explain types of FOFs? (2)

A

Fettered funds - only uses funds of host provider - correlation and diversification considered

Unfettered funds - can use funds from other companies - additional expense of charges of underlying fund

262
Q

Multi-manager funds

What is a tax advantage of FOFs?

A

Provides a CGT shelter, because switching between funds by the manager does not create any CGT liability

263
Q

Multi-manager funds

MOM fund describe? (3)

A
  • Overall manager appointed to source best fund manager in each sector
  • Rather than selling assets can just be assigned to new manager
  • Cost transparency is greater for MOM than FOF
264
Q

Offshore Funds

Categories? (3)

A
  • UCITS funds
  • S.270 designated territories funds
  • S.272 non-designated territories funds
265
Q

Offshore Funds

UCITS?

A

Receive automatic recognition from FCA as authorised by EU

266
Q

Offshore funds

S.270?

A

Protection equivalent to FCA as satisified country has similar rules to UK

267
Q

Offshore funds

S.272?

A

Not recognised by FCA and marketing prohibited in UK

268
Q

Offshore collectives

Tax treatment of investors - reporting funds? (5)

A
  • Dividends and interest same as UK and normal CGT rules
  • Dividends from funds constituted as companies is taxed as foreign dividend
  • Must be declared to HMRC
  • UK investor willl be taxed on their share ofthe income even if distribution is not received
  • If fund has > 60% of interest bearing assets, distribution will be treated as interest and taxed at 0%, 20% 40% or 45%
269
Q

Offshore collectives

Tax treatment of investors - non-reporting funds?

A
  • Often accumulative funds therefore no dividend or income (if equities dividends have to pay withholding tax
  • CGT on CGT principles BUT chargeable as income tax therefoe higher rates
  • No allowances
270
Q

Offshore collectives

Non-reporting funds - advantages? (2)

A
  • Grow faster as low tax environment
  • If non-UK domicile - no IHT
271
Q

Offshore funds

Taxation treatment? (3)

A
  • If equity - dividends subject to non-reclaimable withholding tax
  • If fixed interest - tax free income as income is paid gross
  • May be small amount of tax e.g. Jersey funds are subject to small flat annual corporation tax charge
272
Q

AIFs

What can they be elected to be taxed as?

What does this mean? (2)

A

Tax-elected fund (TEF)

  • Required to make a dividend and non-dividend (interest payment)
  • Moves point of tax from TEF to investor
273
Q

Share exchange facility

What is it?

A

Investors can exchange shareholdings on stock exchange for units/shares in fund

274
Q

Share exchange facility

Why do this?

A

Cheaper for disposing of small shareholdings

275
Q

Share exchange facility

Minimum?

CGT exemptions?

A
  • Either accepts shares and adds into fund or
  • Disposes of shares and buys new units
276
Q

Share exchange facility

Minimum?

CGT exemptions?

A

£1,000

No investor CGT exemptions

277
Q

Pricing

What are the two methods of fair value pricing a unit trust manager can elect to use? (2)

A
  • Dual pricing
  • Single pricing
278
Q

Pricing

What is dual pricing?

A

Determines:

The highest price at which units can be sold to investors (offer)

The lowest price a manager can repurchase from investors (bid)

Difference = bid-offer spread

279
Q

Pricing

What is single pricing?

A

Uses mid market pricing therefore incoming and outcoming investors deal at same price

280
Q

Pricing

Single Pricing - each share price reflects?

A

Total net value of fund’s assets

281
Q

Pricing

Single Pricing - no allowance for?

A

Dealing costs and charges are shown separately

282
Q

Pricing

Single Pricing - shares purchased at?

A

Single price and initial charge

283
Q

Pricing

How to calculate buying or offer price? (5)

A
  • market buying value of underlying securities;
  • add costs of buying securities in the market;
  • add on all the other property of the trust, such as uninvested cash and any accrued income less tax, fees, charges and expenses;
  • divide the total by the number of units issued;
  • add on the initial charge and express the price to four significant figures
284
Q

Pricing

How to calculate selling or bid price? (6)

A
  • value underlying securities at the best market selling prices;
  • deduct the dealing costs that would be incurred if the securities were to be sold;
  • add in any uninvested cash;
  • add any accrued income after deduction of any annual management fees, trustees’ fees, audit fees and outstanding tax;
  • divide the total by the number of units in issue;
  • express to four significant figures
285
Q

Pricing

Bid offer spread is and expressed as?

A

Difference between buying and selling prices, expressed as a % of the buying price

286
Q

Pricing

What does the bid offer spread include? (2)

A
  • Dealing costs
  • Initial costs
287
Q

Pricing

Bid offer spread varies depending on what? (3)

A
  • Type of asset
  • How easy it is to buy or sell
  • How liquid the asset is
288
Q

Pricing

What is the usual bid offer sread for the following:

  • Equity funds?
  • No load index trackers?
  • Smaller companies and emerging markets?
  • Cash?
A
  • 5% to 7%
  • >1%
  • >10%
  • Often no spread at all
289
Q

Pricing

If demand is high for units what happens to the unit buying price?

A

Manager sets buying price at offer end

290
Q

Pricing

If demand is low for units what happens to the unit buying price?

A

Manager sets buying price at bid end

291
Q

Pricing

What is the box?

A

Manager holds new units or units that have been repurchased from investors

292
Q

Pricing

What is Box management?

A

Stock control mechanism applied by managers in buying and selling of units

293
Q

Pricing

Why decide to hold units in a ‘box’? (3)

A
  • Fund is expanding as investors are buying, the manager will create units at the creation price
  • Fund is contracting, there are more sellers than buyers, the manager will cancel units at the cancellation price
  • Weighing up the risk of the market turning and expected future demand
294
Q

Forward and historic pricing

What is it?

A

Forward - price calculated at next valuation

Historic - price calculated at last valuation

295
Q

Forward and historic pricing

When must managers go from historic to forward?

A

If value has changed by 2% or more since last valuation, and if the investor requests it

296
Q

Forward and historic pricing

Most managers deal on what pricing basis?

A

Forward basis

297
Q

Authorisation of collective investment funds

What is COLL?

A

FCA detailed framework for authorisation and operations of collective investment schemes

298
Q

Charges

Investors in unit trusts incur different types of charges, what are they? (5)

A
  • Initial charge
  • Annual management fees
  • Performance fees
  • Exit charges
  • Other charges - e.g. legal and audit fees
299
Q

Investment Trusts

Formed under what Act?

Subject to regulations from? (2)

A

Companies Acts

  • FCA - FSMA 2000
  • HMRC - s.842 approval - Income and Corporation Taxes Act 1988
300
Q

Investment Trusts

Can invest in? (3)

A
  • Any kind of company, whether its shares are quoted, unquoted, private company
  • Provide venture capital to new firms or firms that want to expand
  • Any country in the world
301
Q

Investment Trusts

Who do they cater for?

A

Extremely adventurous investors

302
Q

Investment Trusts

Traded as?

A

PLCs on LSE

303
Q

Investment Trusts

How do they work? (5)

A
  • Structured as a normal company with directors and shareholders
  • Issue a fixed number of shares (close-ended)
  • Regulated by company law
  • As PLCs they can borriw to ‘gear up’
  • Shares are traded on LSE
304
Q

Investment Trusts

Directors can employ a fund manager in two ways?

A
  • Salaried fund manager - self managed trust
  • Contract a external fund mangement group
305
Q

Investment Trusts

Operate what kind of pricing?

A

Dual-pricing known as market makers spread or turn

306
Q

Investment Trusts

Advantages of the fixed capital structure? (3)

A
  • Managers can take a longer term view
  • Not forced to sell assets to pay investors as secondary market
  • Can gear portfolios
307
Q

Investment Trusts

To not be liable to CGT, what must the company do? (3)

A
  • Resident in the UK
  • Listed on the LSE
  • Doesn’t retain >15% of gross income
308
Q

Investment Trusts

Premiums?

When does it occur?

A

If share price is higher than the NAV per share, then the IT is trading at a premium

e.g. If share price is 210p, NAV is 200p, the premium is 5%

Occurs when high demand for IT

309
Q

Investment Trusts

Discounts?

Occurs when?

A

Share price is lower than NAV per share - trading at a discount, as buying underlying assets at lower price than if bought directly

e.g. Share price is 180p, NAV is 200p, the discount is 10%.

Occurs when more sellers than buyers

310
Q

Investment Trusts

Narrowing discounts?

A

Provides better returns on share price than underlying assets

311
Q

Investment Trusts

Widening discounts?

If stock market falls at same time?

A

They reduce the gain an investor could potentially receive

If stock market falls as well, investor loses > reduction in value of a trusts investments

312
Q

Investment Trusts

NAV of trust equals..?

A

Total value of all the investments held less any liabilities

313
Q

Investment Trusts

Calculating NAV per share? (5)

A
  • total value of a trust’s listed investments at mid-market prices;
  • plus unlisted investments as valued by the directors;
  • plus cash and any other assets;
  • less nominal value of loans, debenture stock and preference shares
  • resulting figure is known as shareholders’ funds
314
Q

Investment Trusts

Why is the NAV calculation misleading?

What should you use instead?

A
  • Many ITs issue warrants or loan stocks with option to convert to ordinary shares
  • Diluted NAV - assumes all options are exercised
315
Q

Investment Trusts

Capital structure? (2)

A
  • Conventional
  • Split capital
316
Q

Investment Trusts

What is a Conventional trust?

A

Issue one main class of equity share (ordinary share) - investors entitled to all income and capital, indefinite term

317
Q

Investment Trusts

What is a limited life investment trust? (3)

A
  • Fixed initial term
  • On maturity investors vote whether to wind up trust or contine - typical term is 3 years
  • Closer to date the narrower the discount as investors can obtain full value of assets if wound up
318
Q

Investment Trusts

What is the advantage of a limited life investment trust to the investor?

A

Helps to reduce the discount

319
Q

Investment Trusts

What is a split capital investment trust? (4)

A
  • One portfolio of investments produces both growth and income
  • Issue multiple classes of equity shares with different priorities on wind up
  • Limited life span 5-10 years
  • Investors are not locked in
320
Q

Investment Trusts

Split capital investment trust - important rates? (3)

A
  • Redemption yields - told return on maturity
  • Hurdle rate - rate the investment must grow in order to replay each class of share at the wind up date
  • Wipe out rate - annual rate of decrease in gross assets - no capital payment on wind up
321
Q

Investment Trusts

Asset cover?

A

Way of measuring the company’s ability to meet or cover, from current assets, the liability to share classes with a pre-determined redemption price

322
Q

Investment Trusts

Asset cover - what is taken into account first?

A

Any shares ranking for prior payment

323
Q

Investment Trusts

Asset cover - what does a cover of 1 mean?

A

Assets exactly cover the redemption price.

A cover of 50% or 0.5 means that half of the redemption price is covered

324
Q

Investment Trusts

Share classes? (3)

A
  • Ordinary shares - entitled to all income and growth
  • Preference shares - fixed dividend,
  • Split capital shares - income shares, capital shares, packaged units, zero dividend preference shares
325
Q

Warrants

What are they? (5)

A
  • Right to buy shares at a fixed price at pre-determined date or within a specified period
  • No income is produced
  • Price is a fraction of the share price
  • Potentially high risk and high reward
  • Bought and sold on LSE upto final exercise date
326
Q

Warrants

Tax? (2)

A
  • No income tax liability - as no dividends
  • CGT on gain in excess of annual exemption
327
Q

Warrants

Typically issued as …? (2)

A
  • Sweeteners - when new shares issued e.g. one warrant given for every 5 shares purchased
  • Newly opened ITs usually trade at a discount, immediate loss due to launch costs - so they need a sweetener
328
Q

Warrants

How can they dilute NAV?

A

If warrants are exercised and more shares created, there will be a dilution in the NAV per share of existing shares

329
Q

Warrants

What can companies do to stop dilution of NAV?

A

Repurchase their warrants to reduce the dilution effect

330
Q

Share buybacks

What are they?

A

When investment trusts buy their own shares

331
Q

Share buybacks

What are they used for? (2)

A
  • To return money to shareholders
  • Reduce discounts
332
Q

Share buybacks

Gives the board greater control of what?

A

Balance supply and demand and help reduce the discount

333
Q

Share buybacks

To carry out need permission from?

A

Shareholders

334
Q

Gearing

Equation?

A

Total gross assets

DIVIDED BY

Net assets

MULTIPLIED

100

335
Q

Gearing

If 100 - what does this mean?

A

No gearing

336
Q

Gearing

If 120 - what does this mean?

A

Fund is 20% geared (20% of the total assets are borrowed funds)

337
Q

Gearing

What is it?

A

Fund borrows money to buy shares and other assets, if they do not have sufficient free capital

338
Q

Gearing

What does it relate to? (3)

A
  • Financial gearing (e.g. bank loans and debentures)
  • Structural gearing (in case of splits)
  • Investing in other geared investments e.g. warrants
339
Q

Gearing

What is structured gearing for ITs?

A

Is inherent in the nature of split capital ITs, each share class has varying risk

340
Q

Gearing

What are the effects of structured gearing for ITs? (3)

A
  • returns on each class of share are affected by the entitlements of other share classes that rank for prior payment;
  • number of share classes and their particular entitlements determine the level of structural gearing involved;
  • classes of shares that are lower down the order of entitlement are higher risk as a result of the capital structure
341
Q

Geared investment trusts

When must enhanced risk warnings be given to clients? (3)

A
  • an investment trust uses gearing as an investment strategy
  • it invests in other investment trust companies that use gearing as an investment strategy
  • exposure to gearing subjects value to significant fluctuations compared with the underlying investment
342
Q

Geared investment trusts

Definition of significant?

A

If no underlying or structural gearing and financial gearing is below 30%, investors do not need to be given enhanced risk warnings

343
Q

Investment trusts charges

What is the typical AMC?

A

Lowest on older ITs - 0.5%

New, specialist ITs - 1 to 1.5%

344
Q

Investment Trust charges

OCF adds %?

Includes?

A

+ 0.2 to 0.5%

Includes all other expenses of running the fund

345
Q

Investment trust charges

Difference between OCF and TER?

A

TER includes performance fees

346
Q

Investment trust charges

What do OCF and TER not include? (4)

A
  • Entry or exit fees
  • Interest on borrowing
  • Brokerage charges
  • Dealing costs
347
Q

Investment trusts

Taxation of IT companies? (3)

A
  • Approved by HMRC - not subject to CGT on gains
  • No additional tax on franked income (franked income is the dividend income that investment trusts receive from their shareholdings in UK companies)
  • Corporation tax payable on unfranked income, for example, interest from gilts and bank deposits. Can reduce by offsetting expenses – interest paid on borrowings and management fees
348
Q

Investment trusts

Taxation of the investor? (4)

A
  • First £2,000 dividend income annually is tax free.
  • Sums above this are taxed as any other dividend
  • Investors are liable to CGT on any profit - total gains on all disposals, after deduction of losses, exceeds an investor’s CGT annual exempt amount.
  • If held in an ISA, all dividends and capital gains are tax free
349
Q

Investment trusts

Advantages over unit trusts and OEICs? (5)

A
  • Cost of purchasing shares usually lower
  • AMC cheaper for older contracts
  • Higher risk but potential higher reward - trading at discount and gearing
  • Can provide higher levels of income
  • Some ITs can’t be accessed as OEICs and unit trusts e.g. guaranteed or protected funds
350
Q

UCITS

What does it stand for?

A

Undertakings in Collective Investment and Transferrable Securities

351
Q

UCITS

To meet FCA rules? (4)

A
  • No more than 10% in any one share
  • Only 4 companies can have 10%
  • Any other holdings must not exceed 5%
  • Minimum of 16 holdings
352
Q

UCITS

If replicating tracker fund?

A

Hold up to 20% of the value of the fund in the shares of one company and, where justified by exceptional circumstance, up to 35%

353
Q

UCITS

Maximum holding in unlisted securities?

Maximum holding in another collective investment?

354
Q

UCITS

Borrowing - retail and non retail?

A
  • Retail can’t borrow on permanent basis, but can can borrow up to 10% fund on temporary basis against future cash flows
  • Non-retail can borrow 10% on permanent basis
355
Q

UCIS

Stands for?

A

Unregulated Collective Investment Schemes

356
Q

UCIS

Can they be marketed to UK retail investors?

357
Q

UCIS

Fit into which category?

Includes?

A

Non-mainstream pooled investments (NMPI)

Qualified Investor Schems (QIS)

Traded life policy investments

358
Q

Life assurance based investment

3 types?

A
  • With Profit - same as non-profit but bonuses added annually in arrears
  • Unitised with profit
  • Unit linked
359
Q

Non-profit policy

What is it?

A

If certain criteria is met by the policy holder eg regular premiums or lump sum paid the sum assured paid to the policy holder.

Sum assured is the notional intrinsic underlying value

360
Q

With-profits bonuses

Investment performance is reflected in bonuses - explain? (3)

A
  • Added to the value of the policy annually. Based on companies profits, not guaranteed but, once added, cannot be taken away.
  • Annual bonuses based on performance of fund, expressed as % of sum assured and calculated on a simple or compound basis.
  • Final bonuses paid on maturity, death, sometimes surrender. Represent fund capital growth over entire period. More volatile, directly affected by changes in markets, not guaranteed
361
Q

Closed with-profit funds

What is asset allocation and what does this mean?

A

Most hold higher fixed interest and lower equities

Usually mean lower performance over long-term

362
Q

Closed with-profit funds

Problem with remaining in fund when others leave on MVR free days?

A

Fund becomes weaker - decreases value of underlying assets

363
Q

Conventional with profits

Advantages? (5)

A
  • Suitable for risk averse
  • Bonuses paid from firm’s reserves
  • Smoothed return - makes feel safer
  • Attraction of terminal bonus
  • Final return often greater than inflation
364
Q

Conventional with profits

Disadvantages? (4)

A
  • Difficult to understand
  • Difficult to appraise underlying investment performance
  • MVR can reduce liquidity
  • Bonus rates have decreased in recent years
365
Q

MVR

What is it?

When is it not applied? (2)

A

Market Value Reduction - can reduce the amount payable on surrender

Not applied on death or maturity

366
Q

MVR

Why is applied?

A

Applied so value leaving fund doesn’t exceed value of underlying assets

367
Q

Unitised with profits

Describe?

A

With profit investment expressed as unit-linked policy. Premiums buy units in the unitised with profit fund. Unit price is guaranteed not to fall

368
Q

Unitised with profits

Type? (2)

A
  • Fixed priced - unit price never varies, bonus adds units, cannot be taken away by the life office. Increase units daily by % of annual bonus set
  • Variable price - unit price is increased through addition of regular bonuses, guaranteed not to fall
369
Q

Unitised with profits

Advantages? (5)

A
  • Bonus rate declared annually in advance
  • Easier to understand current value
  • Switches can be made with other unit-linked funds
  • Involves the insurance company in less initial commitment of reserves than traditional with profits
  • Final bonus usually paid on death or maturity
370
Q

Unit linked funds

How is policy value measured?

A

By number of units allocated

371
Q

Unit linked funds

Surrender value at start?

A

Lower than the premium paid due to initial charge, usually 5%, and early termination charge

372
Q

Unit linked funds

Policy returns depend on? (2)

A
  • Fund performance
  • Exact days which the policy is set up and cashed in
373
Q

Life assurance investments

Use of? (5)

A
  • Unique types of product available
  • Some regulated products
  • Property fund with actual property not property shares
  • Favourable tax treatments
  • Funds switched without cost or tax consequences
374
Q

Qualifying policies

Qualification test? (6)

A
  • Term must be at least ten years
  • Premiums must be payable annually or more frequently for at least ten years (or until a claim on death or disability)
  • Minimum level of life cover is 75% of the total premiums payable
  • Premiums payable in any one year must not be more than double those payable in any other year
  • No premium is to be more than one-eighth of the total premiums payable over the term of the policy
  • Annual limit for premiums is £3,600
375
Q

Chargeable events for non-qualifying policies

Chargeable events? (5)

A

D.A.M.P.S

  • Death of life assured
  • Assignment for money or money’s worth
  • Maturity
  • Part surrenders
  • Surrender or final encashment
376
Q

Chargeable gains

Formula at maturity?

A

Maturity Value + partial surrender in 5% rule

MINUS

Premiums paid + premiums chargeable gains

377
Q

Investment bonds

What are they? (5)

A

S.P N.Q WOL N.R

  • Single premium
  • Non-qualifying
  • Whole of life policy
  • Nominal life cover usually 101% of value of the units
  • Regular withdrawals are return of capital rather than income
378
Q

Investment bond

Advantages? (3)

A
  • Can switch fund with no CGT
  • For higher rate tax payer lower tax
  • Can withdraw 5% annually
379
Q

Investment bonds

Disadvantages? (4)

A
  • Not tax free but deferred
  • Paid on income tax rather than CGT so can’t use annual exemption amount
  • If investor’s tax rates likely to increase
  • Any chargeable gain could remove MCA/ child benefit
380
Q

Investment bonds?

Types? (7)

A
  • Guaranteed income bonds
  • High income bonds
  • Guaranteed growth bonds
  • Distribution bonds
  • Guaranteed protectd equity bonds
  • With profit bonds
  • Unit-linked bonds
381
Q

Guaranteed income bond

Explain?

Good for?

A

Guaranteed income each year for specified term (payable in arrears, up to 5 years). On maturity capital is returned

Good for BRT as no additional tax

382
Q

High income bonds

Characteristics? (3)

A

Based on package of derivatives -

  • Offer a high level of income, e.g. 10%, for five years, but do not guarantee return of capital
  • Return of capital depends on performance of one stock market index, or average of two or three.
  • Provided the index meets a pre-set performance target, capital is returned in full. If less maturity will be less than original investment
383
Q

Guaranteed growth bond

Explain?

A

Similar to guaranteed income bond but pay no income, free of CGT, usually invested in gilts

384
Q

Unit linked bond

Explain?

A

Liability to basic rate income tax is covered by tax paid within the fund, take 5% tax deferred withdrawals each year for 20 years or until the original capital has been returned

Good for higher rate tax payers

385
Q

Distribution bonds

Explain?

A

Distinguishes between capital and income. Income paid = income generated

386
Q

Guaranteed equity bonds

Explain?

A

Guaranteed return of capital plus % of growth of index to which it is linked. Guarantee generally operates on a fixed date

387
Q

Protected equity bond

Explain?

A

Quarterly guaranteed level of protection between 95-100% of capital - protected against this level of fall in market - if 95% can still lose 20% a year

388
Q

Bonds as trust investments

Why are they used? (5)

A
  • Variety of funds available to meet requirements of trust
  • No taxable income generated therefore less admin and expenses
  • Life fund pays less corporation tax than if trustees paid on income generated
  • Policies can be assigned to beneficiary with no tax charge on transfer
  • Up to 5% can be withdrawn without a tax liability
389
Q

Bonds as trust investments

Liability for chargeable gain on trust - if individual who created trust alive and living in the UK?

A

Treated as part of individual’s income

390
Q

Bonds as trust investments

Liability for chargeable gain on trust - if individual dead or living abroad?

A

Trustees chargeable on gain and no top slicing relief

391
Q

Bonds as trust investments

Liability for chargeable gain on trust - if all trustees not resident in UK?

A

Beneficiary taxed and no top slicing relief

392
Q

Offshore bonds

Benefit from?

A

Gross roll-up - as not taxed until chargeable event

393
Q

Offshore bonds

How to calculate chargeable gain?

A

Total gain

multiplied by the following fraction

number of days policyholder resident in UK

divided by

number of days policy has run

394
Q

Offshore bonds

What circumstance would lead to a chargeable gain being zero?

A

If policy holder was outside the UK, for the whole time

395
Q

Offshore bonds

When is chargeable gain top-sliced back to if full surrender?

If partial withdrawal?

A

Always top-sliced back to the start date

Depends if time apportionate relief applies - if no, back to last chargeable gain. If yes, back to start date, but reduced for periods not UK resident

396
Q

Offshore and onshore bonds compared

Are charges higher on offshore or onshore bond?

A

Offshore, which reduces the final net return received by an investor

397
Q

Offshore and onshore bonds compared

Reasons why onshore bonds may be preferrable to offshore on encashment?

A

Onshore bond gains benefit from indexation relief up to 31.12.17, net gain taxed at 20% or 25%, whereas offshore gains for higher and additional rate taxpayers are taxed at 40% and 45%, no indexed relief

398
Q

Offshore and onshore bonds compared

Reasons why onshore bonds may be preferrable to offshore on investment income?

A

Some investment income received by an offshore fund may be received after deduction of non-reclaimable withholding tax, reducing the effect of the gross roll-up. In addition, there would be no credit for this in the chargeable gain, leading to possible double taxation

399
Q

Personal portfolio bond

What is it?

What is the deemed gain?

A

If an investor has a portfolio of shares and wants to manage it themselves rather than life office

Deemed gain is 15% of the total premiums paid at end of the year plus total deemed gains from previous years

400
Q

Traded endowment policies (TEP)

Can they be bought and sold?

How does it work for the seller and buyer?

A

Yes - original owner can assign product to someone else for a payment normally higher than surrender value

Buyer - although future premiums have to be paid, maturity value may be high, early profit if life assured dies

401
Q

Traded endowment policies

Taxation on the seller?

A

Qualifying policy is sold after ten years, or three-quarters of the term, it is not a chargeable event, no income tax.

If sold < ten-year or three-quarter term, it is chargeable event, and selling a non-qualifying policy is always a chargeable event.

Higher or additional-rate taxpayer, the gain is subject to 40% or 45% tax. Gain is subject to top-slicing relief

No CGT liability on seller, provided they are the original beneficial owner

402
Q

Friendly societies

What do they sell?

A

Qualifying policies with limited premiums

403
Q

Friendly societies

Limits on premiums?

A

£270 per year or £25 per month

404
Q

Friendly societies

Can children under 18 take out these policies?

A

Yes - known as baby bonds

405
Q

Friendly societies

What are FS policies free of?

A

Free of UK tax on investment income and capital gains

406
Q

Friendly societies

What is the life cover amount?

A

Minimum amount is 75% of total premium

407
Q

Exchange traded funds (ETFs)

What are they and what are they similar to?

A

Index trading funds listed and traded on stock markets

Similar to index-tracking pooled funds but traded like a single share through stcokbrokers

408
Q

Exchange traded funds (ETFs)

Broker fees, stamp duty, management charge?

A

Yes broker fees

No stamp duty

Less than 0.5%

409
Q

Exchange traded funds (ETFs)

Usually track by?

A

Fully replicating index - buy exactly same investments and rebalance when index rebalanced

410
Q

Exchange traded funds (ETFs)

Tax on investor?

A

Income tax on dividend payments

CGT on gains arising from disposal

411
Q

Exchange traded funds (ETFs)

Are ETFs usually held offshore or onshore?

A

Offshore - check fund prospectus to ascertain tax treatment

412
Q

Exchange traded commodity

What is it?

A

Similar to ETF, tracks performance of an underlying commodity or basket of commodities, or index designed to measure value of that commodity

413
Q

Exchange traded notes (ETNs)

What are they and how does they differ to ETFs?

A

Similar to ETF, traded on stock exchange, performance tracks movement of an index.

It is a type of bond issued by a bank, maturity date, do not pay interest and there is no portfolio of investments, they use derivatives to track the index

414
Q

Exchange traded notes (ETNs)

What is the additional risk?

A

As they are unsecured bonds, their value will be affected by credit rating of the issuer & potential default risk

415
Q

Property based investments

What are the types of indirect property investment? (4)

A
  • Shares in listed property companies
  • Property unit trusts and investment trusts
  • Insurance company property funds
  • Real estate investment trusts (REITs)
416
Q

Shares in listed property companies

How does it differ to direct property investment? (5)

A
  • Diversified over a number of properties
  • Share prices are affected by management and borrowing, as well as asset value
  • Property shares can be highly geared - more volatile
  • Share prices will rise and fall independently of the underlying asset values - supply and demand: stock market and company risk
  • Company liable to corporation tax on capital gains and rental income
417
Q

Property unit trusts and investment trusts

Required to hold..?

A

Invest primarily in shares and securities of property companies, can hold small % in direct property

418
Q

Property unit trusts and investment trusts

Price of units is linked to..?

A

Value of the investments held in the fund

419
Q

Property unit trusts and investment trusts

Capital gains tax?

A

No tax on gain within fund

Investor is subject to CGT when gains realised on disposal

420
Q

Property authorised investment funds (PAIFs)

What are the main conditions PAIFs have to meet? (3)

A

At least 60% net income from exempt property investment business

Value of property investment business must be at least 60% of the total assets

No corporate investor can hold 10% or more of the fund’s NAV

421
Q

Property authorised investment funds

What is it? (3)

A
  • FCA authorised OEIC that invests mainly in property
  • Taxation moves from fund to investor
  • Property income is ring-fenced as ta exempted in fund, but other income 20% corporation tax
422
Q

Property authorised investment funds

How are distributions made to investors? (3)

A
  • Property income - paid net of 20% income tax
  • Interest income - paid gross
  • Dividends - paid gross
423
Q

Insurance company property funds

What are they?

A
  • Funds which specialise in direct holdings of commercial property
  • Available as regular and single premium
424
Q

Insurance company property funds

Main features? (4)

A
  • Unit value linked to property value
  • Cannot borrow
  • Liquidity is higher than direct property investment
  • Income and capital gains are subject to up to 20% tax within the fund
425
Q

REITs

What is the aim of a REIT? (3)

A
  • Provides a liquid market in property investment
  • Widely accessible
  • Tax treatment is closely aligned to direct investment in property
426
Q

REITs

Structure?

A
  • Must be closed ended, so not an OEIC
  • UK resident for tax
  • Ony issue one class of ordinary share
  • Listed on recognised stock exchange (includes AIM)
427
Q

REITs

Tax structure? (2)

A
  • Ring-fenced property letting business, corporation tax exempt
  • Non-ring-fenced business, other activities, e.g. property management services – profits and gains are subject to corporation tax
428
Q

REITs

Conditions to qualify as a REIT? (3)

A
  • At least 75% gross profits from the property rental (tax-exempt part)
  • Value of the assets in the tax-exempt part must be at least 75% of the total value of the assets (ignoring secured loans)
  • REITs cannot have an excessive amount of debt financing – interest on borrowings has to be at least 125%, covered by rental profits
429
Q

REITs

Investor tax? (3)

A
  • Distribution from ring-fenced part - paid of 20% income tax - HRT and ART will have to pay extra income tax
  • Distribution from no-ring fenced part - treated as other UK dividends - investor tax will depend on individual position
  • Gains subject to CGT
430
Q

Private Equity

What is it?

A

Investor provides medium to long term finance in return for an equity stake in an unquoted company

431
Q

Private equity

How can investment in this asset classed be acheived? (3)

A
  • EIS
  • SEIS
  • VCT
432
Q

EIS

Tax relief? (4)

A
  • Income tax relief at 30% given for qualifying investments
  • Up to £2 million - if £1 million is invested in knowledge intensive companies
  • Investor must have income tax liability of at least amount being claimed
  • Relief is given as reduction to investor’s tax liability
433
Q

EIS

Current tax regime charateristics? (2)

A
  • Relief withdrawn if shares are disposed of within three years, except to spouse and not on the death of investor
  • Investor - carry back income tax relief to previous tax year
434
Q

EIS

What are the conditions to defer CGT through EIS investment? (5)

A
  • Reinvest capital gain within 1 year and 3 years after disposal
  • Deferred gain is bought into charge on diposal of EIS, unless reinvest
  • CGT rate is current rate
  • Gains on the disposal of EIS that qualified for income tax relief are exempt from CGT, as long as the shares are held for 3 years
  • Losses are allowable, and can be set against chargeable gains or income
435
Q

EIS

If shares held for at least 2 years , what do they qualify for?

A

100% business relief for IHT purposes as unquoted companies

436
Q

EIS

Qualifying company? (6)

A
  • Unlisted and no plans to become listed
  • Fewer than 250 employees (500 if knowledge intensive (KIC))
  • Gross assets less than £15m before shares issued and £16 m after
  • Raised less than £5m under VCT in 12 months (£10m if KIC), less than £12 m in lifetime
  • Must be made within 7 years of company’s first commerical sale, (10yrs is KIC)
  • Qualifying trade with permanent UK base
437
Q

EIS

Qualifying individual?

A
  • Not connected to company
  • Non-UK resident is elgible, but can only claim tax relief on income tax liability
438
Q

EIS

Risks?

A
  • Company may fail
  • Held for 3 years
  • May be difficult to dispose of shares, as the market is illiquid
439
Q

SEIS

Main conditions for a company? (5)

A
  • Unquoted at the time of issue of the shares
  • Employ 25 people or less
  • Less than two years old
  • Less than £200,000 in gross assets
  • Meet the qualifying trade rules
440
Q

SEIS

Income tax relief?

A

50% of share cost up to a maximum of £100,000 a year

441
Q

VCTs

Further rules? (7)

A
  • All money raised must be used in 2 years
  • Income must be wholly or mainly derived from shares or securities and retain 15%
  • At least 80% in qualifying holdings
  • Not more than 15% in a single company
  • At least 70% in new ordinary shares
  • At least 10% in ordinary, non-preference shares
  • Exempt from corporation tax on disposal of investments - can be distributed as dividends with no tax liability for investor
442
Q

VCTs

What are they and what does the investor buy?

A

Listed fund with pooled characteristics

Investor buys fund shares

443
Q

VCTs

Annual investment limit and tac relief?

A

£200,000

30%

444
Q

VCTs

What is the holding period for the retention of income tax relief?

A

5 Years - only available on subscription of new shares

445
Q

VCTs

Is reinvestment relief and business available available?

446
Q

VCTs

Tax treatment? (4)

A
  • Tax free dividends
  • Tax free CGT
  • No loss relief
  • No corporation tax on gains on disposal
447
Q

Knowledge Intrinsic Company (KIC)

What is it? (4)

A
  • Carrying out research, development or innovation
  • At leasts 10% of operating costs spent on this and at least 15% in one of past 3 years
  • Creating intellectual property
  • 20% of employees carrying out reserach and development
448
Q

ISAs

Eligible investments for stocks and shares ISA? (2)

A
  • Normally must be listed on recognised stock exchange
  • Shares acquired with previous 90 days from SAYE or share incentive plan
449
Q

ISAs

Investor eligibility? (5)

A
  • Resident in the UK for tax purposes
  • Crown employee or spouse or civil partner if they don’t live in the UK
  • 18 or over - stocks and shares ISA or innovative finance ISA
  • 18 or over but under 40 - Lifetime ISA
  • 16 or over - cash ISA
450
Q

ISAs

Main types of ISA? (10)

A
  • Unit trust and OEIC
  • Investment trust
  • Managed
  • Self-select
  • Corporate
  • Derivative-based
  • Cash
  • Help to buy
  • Innovative finance
  • Lifetime
451
Q

ISAs

What are self-select?

A

Select own holdings sometimes restricted to FTSE 100

452
Q

ISAs

What are corporate ISAs?

A

Only invest in one company - charges are generally lower

453
Q

ISAs

What are deriative based ISAs?

A

Offer stock market index-linked capital return at the end of 3 - 5 years - a fixed income or a minimum maturity guarantee

454
Q

ISAs

What is an Innovative ISA?

A

Peer-to-peer lending

455
Q

ISAs

Transfers between ISA Managers take how long? (2)

A

15 working days - Cash and Cash lifetime

30 working days - Stocks and shares, innovative and lifetime

456
Q

ISAs

Termination of ISA - death?

A

Becomes a continuing account of a deceased investor

No funds can be added, income and gains remain tax free until estate administered and ISA closed, or 3 years from date of death

457
Q

ISAs

If spouse inherits ISA?

A

Spouse inherits one-off additional ISA allowance to reinvest into their ISA set at higher of value at date of death or investment value when passed on

458
Q

ISAs

Stakeholder -deposit acount? (5)

A
  • No charges on stakeholder cash ISA
  • Minimum deposit can not be higher than £10
  • Unlimited withdrawals paid 7 days or less
  • Interest rate no less than 1% below BoE base rate
  • If BoE increases, rate must follow within 1 month
459
Q

ISAs

Stakeholder stocks and shares - annual charge?

A

Limited to 1.5% of fund during first 10 years and 1% thereafter

460
Q

ISAs

Stakeholder stocks and shares - minimum investment and % risk?

A

Can not be higher than £20

No more than 60% in riskier assets (shares and property)

461
Q

ISAs

Stakeholder smoothed MTIP - extra terms?

A
  • Some of return in good years into smoothing account
  • If smoothed account is low, policyholders can be charged extra
  • Managers must make info available about smoothing policies
  • Whole of with profit fund and smoothing account are for benefit of policyholders
462
Q

Derivatives

What are they? (2)

A
  • A financial contract whose value is derived from the value ofan underlying asset
  • Allowing exposure of underlying asset without ownership
463
Q

Deriatives?

Two ways of buying derivatives? (2)

A
  • Bought and sold on recognised exchange - exchange traded - standard terms and conditions therefore cheaper and easier to trade
  • Over the counter (OTC) - created bespoke for a customer’s needs and sold directly to them
464
Q

Deriatives?

What is standardised on exchange? (4)

A
  • Quality
  • Quantity
  • Delivering date
  • Delivery price
465
Q

Futures

What are they? (2)

A
  • Exchange traded forward contract
  • Buy and sell at specified future date at price agreed when contract made
466
Q

Futures

What is consideration?

A

Required to establish a contract - initial margin i.e. a deposit

467
Q

Futures

What is variation margin?

A

Daily price changes - if fails to pay exchange close all client’s open positions by buying equal but opposite contracts

468
Q

Futures

Marketing to market?

A

Revalued on daily basis - takes into account any movement in prices and closely mirrors change in price of underlying asset

469
Q

Futures

Buyer is hoping for..and this is know as?

A

Long view - market price increase therefore on agreed date can buy at a lower price than market

470
Q

Futures

Seller is hoping for…amd this is know as?

A

Short view - hoping the market price falls, therefore they can sell at a higher price than the market

471
Q

Futures

Role of London Clearing House (LCH)?

A

Pays profits to one side of contract and receive losses from other -

at expiry of contract client will already have been credited with profit

472
Q

Futures

If physically settled?

EDSP?

A

Seller delivers to buyer and buyer pays seller the exchange delivery settlement price (EDSP)

473
Q

Options

What are they - buyer?

A

An option gives the buyer the right, but not obligation to buy or sell

474
Q

Options

Paying for options - buyer? (2)

A
  • Buyers pays premium - cost of option plus additional commission
  • Does not have to make margin payments
475
Q

Options

Paying for options - seller? (2)

A
  • Receives premium, pays commisison and makes margin payment
  • Initial and variation margin
476
Q

Options

What is a call option?

A

Agreed to buy at

477
Q

Options

What is a put option?

A

Agreed to sell at

478
Q

Options

What is fixed price?

A

Strike price or exercise price

479
Q

Options

Choices? (3)

A
  • Exercise it
  • Sell it
  • Let it expire - worthless
480
Q

Options

European style?

American style?

A

European - can only be exercised at expiry

American - can be exercised at any time

481
Q

Options

Intrinsic value for call options?

A

Current price of the underlying asset is above the option’s strike price

482
Q

Options

Intrinsic value for put options?

A

Current price of the underlying asset is below the option’s strike price

483
Q

Options

Intrinsic value is referred to as what? (3)

A
  • In the money - have intrinsic value
  • Out of the money - no intrinsic value
  • At the money - strike price equals current price
484
Q

Options

Intrinsic value calculation and what do you ignore?

A

Current price against exercise price

Ignore the premium paid

485
Q

Options

Time value? (2)

A
  • Amount an investor is willing to pay for an option above its intrinsic value, in the hope its value will increase before it expires - favourable change in underlying asset value
  • Directly related to how much time until expiry - erodes throughout option’s life
486
Q

Hedging

What are the major uses? (2)

A
  • Protect an existing exposure against future adverse price movements
  • Try to profit by correctly forecasting future price movements
487
Q

Hedging

Hedging a future purchase - if fund manager is expecting to receive a large amount of capital in few months but expects market to rise? (3)

A
  • Wait until money received and buy at higher price
  • Borrow to invest immediately and repay interest
  • Use derivatives - futures or call options
488
Q

Hedging a future purchase

Risk for the fund manager?

A

If market falls is limited to the premium paid for the option plus transaction costs

489
Q

Hedging

If a fund manager believes there will be a sharp downturn in the market and wants to protect value of fund? (2)

A
  • Sell part of the portfolio but if market rises they could lose out - may be restrictions if mandated to hold small amounts of cash
  • Could use derivatives - selling futures or buying put options
490
Q

Hedging

If fund manager wants to protect fund value - and sold futures - want would happen if market fell and if market rose?

A

Market fell - profit on futures used to offset losses on portfolios

Market rose - loss on futures will offset gain on portfolio

491
Q

Hedging

If fund manager wants to protect fund value - and bought put options - want would happen if market fell and if market rose?

A

Market fell - gain on option used to offset loss

Market rose - let option expire and pay premiums and transaction costs

492
Q

Asset allocation

If manager has 65:35 equity:fixed interest and expects equities to fall - what can they do?

A
  • Trade underlying physical assets
  • Sell futures on 10% of portfolio abd buy long gilt futures
493
Q

Asset allocation

Using futures offers significant benefits in terms of? (3)

A
  • Lower dealing costs
  • Speed of dealing
  • Liquidity
494
Q

Speculation

If speculator expects change in interest rates will lead to change in bond yields - whatcould thye do? (2)

A
  • If rising interest rates, bond prices would fall - sell long gilt futures
  • If falling interest rates, bond prices would rise - buy long gilt futures
495
Q

Writing options

Sellers of options known as - risks?

A

Writers - risk is unlimited in return for premium received - most writers are banks or specialist traders

496
Q

Writing options

Why fund manager may write a call option?

Covered?

Uncovered?

A

Increase income to fund by receiving premiums paid

Covered if underlying stock is owned

Uncovered if not owned

497
Q

Writing options

Why a fund manager writes a put option? (2)

A

Receives premium income but has obligation to purchase an asset at a fixed price.

Hope the option will not be exercised - occurs if asset has a price above the exercise price at expiry

498
Q

Taxation of derivatives

CGT?

How does this differ if classed as a trader?

A

Profits from futures and options usually chargeable to CGT

If classed as trader, their profits taxed as income

499
Q

Taxation of derivatives

Buying options (3)

A
  • If call option exercised - cost of option treated as cost of purchase
  • If put option exercised - cost of option is allowable deduction
  • If option expires - treated as disposal for CGT therefore loss
500
Q

Taxation of derivatives

Futures? (2)

A
  • If position closed - money received treated as considration for disposal and money paid = cost
  • If position not closed -any payment made or received treated as consideration or cost of disposal
501
Q

Hedge funds

What are they?

A

Pooled investments, fund manager invests in traded securities. Actively managed to seek positive returns

502
Q

Hedge funds

Strategies? (3)

A
  • Hedge against market downturns
  • Invest in asset classes, that are trading below their true value
  • Use return enhancing tools, e.g. gearing, derivatives and arbitrage
503
Q

Hedge funds

Aim?

A

Give an absolute return with limited volatility rather than trading n index and can even have negative correlation to the market

504
Q

Hedge funds

Invest in?

A

Currencies and shares believed to be trading below their market value

505
Q

Hedge funds

Fund of hedge funds?

A

Made up of multiple hedge funds

506
Q

Hedge funds

Investment strategy? (4)

A
  • Long/short funds - equities and bonds
  • Relative value funds - market neutral - rely on arbitrage
  • Event driven funds -uncorrelated with markets, lower volatility
  • Tactical trading fund - similar to hedge. Trade in currencies, bonds, equities and commodoties - use long/short approach
507
Q

Hedge funds

Relative value funds - what is relying on arbitrage to produce returns?

A

Identify and exploit pricing anomalies between similar investments

508
Q

Hedge funds

Risks? (3)

A
  • Risks are dependent on strategies adopted by fund manager - lack transparency and difficult to assess
  • If highly geared - risks magnified if things go wrong
  • Very expensive - high annual charge, c. 2% plus c.2% manager fee
509
Q

Structured products

Designed to?

A

Acheive a specific set of investment objectives with a speficied risk and reward profile

510
Q

Structured products

Combines?

A

An element of riskier or higher performing asset with element of capital protection

511
Q

Structured products

Characteristics? (9)

A
  • Fixed term
  • No early withdrawals (some may allow partial)
  • Return of capital or income
  • Low fixed interest yields = mechanisms such as caps on growth, kick out clauses, capital protection lost if barrier is crossed, used
  • Minimum or maximum returns are pre-specified
  • Kick out clause - product matures earlu if performance threshold reached
  • No secondary market
  • Offer guarantees
  • Returns based on index
512
Q

Structured products

Structure types? (4)

A
  • 100% capital protected
  • Partial capital protection/ soft protection
  • No protection
  • Investment notes
513
Q

Structured products

If a structured product, 5 year term, 100% protection and participation in growth FTSE 100 index up to a specified limit - what instruments would the wrapper contain? (2)

A

Zero-coupon bond - fixed interest no income, sold at a discount to its par value, providing known amount at maturity - to provide the capital protection

Call option - OTC five year on FTSE 100, capped at specified limit - provide return on FTSE 100

514
Q

Structured products

Partial capital protection explain?

A

Protection only provided if index doesn’t fall below a certain level - this is know as soft protection or contingent capital protection. FCA classes these as SCARPs - structured capital at risk products

515
Q

Structured products

Investment notes explain?

A
  • Once issued listed on London Stock Exchange
  • Investor can sell note and take profits early if markets rise before maturity
  • Underlying investment choice is wider
  • Typically provided by investment banks and more complex than retail packaged products
516
Q

Structured products

Risks? (5)

A
  • Return - how is it calculated
  • Risk profile - underlying asset
  • Costs
  • Encashment penalties
  • Credit/counterparty e.g. Lehman Brothers
517
Q

Structured products

Benefits? (3)

A
  • Wide range of underlying assets
  • No exposure to managers
  • Capital protection - know gain or loss
518
Q

Structured products

Drawbacks? (6)

A
  • Caps on participation rates limit return if market rises
  • Kick-out feature lead to missing out on future growth
  • Averaging of index measurements may dilute returns in rising markets
  • If product can be not be sold on sceondary market, maturity could take place during market fall, profits reduce
  • Falls in equity and market could lead to lose in capital protection, which can not be regained
  • Not suitable for funds needed at short notice
519
Q

Direct investments vs collectives vs investment trusts

Benefits of direct investment? (6)

A
  • Lower costs
  • Portfolio can be tailored to client’s needs
  • Increased transaparency of costs
  • Can exclude holdings for specific reason (e.g. ethical)
  • Gains subject to CGT but often avoided due to annual exemption
  • Larger portfolios can enjoy economies of scale
520
Q

Direct investments vs collectives vs investment trusts

Drawbacks of direct investment? (6)

A
  • Greater volatility as usually fewer investments held
  • For smaller portfolios higher costs
  • Requires high involvement from investment manager
  • Maybe greater admin
  • VAT on management fees
521
Q

Direct investments vs collectives vs investment trusts

Benefits of collective investment? (5)

A
  • Wide variety
  • Spread of risk
  • Can give exposure to markets not available through direct investment
  • No CGT in Trust/ VAT
  • No stamp duty
522
Q

Direct investments vs collectives vs investment trusts

Drawbacks of collective investment? (5)

A
  • Greater management fees
  • Changes to funds can be expensive
  • Little direct involvement for investor
523
Q

Direct investments vs collectives vs investment trusts

Benefits of investment trusts? (4)

A
  • Cost of purchasing shares is often lower
  • Higher reward - trade at discount and gearing
  • Can provide high income
524
Q

Direct investments vs collectives vs investment trusts

Drawbacks of investment trusts? (1)

A

Higher risk as trade at discount and gearing

525
Q

Sharia compliant investments

Three common types?

A
  • Equity funds - returns generated through capital gains, alhtough dividends are permissable if approved by Sharia board
  • Commodity funds - Halal commodities bought at fixed price to re-sell for profit - no futures as deemed to be gambling
  • Ijarah funds - hold tangible assets provide rent. Sukuk is issued to subscriber, represents proportionate beneficial ownership in asset
526
Q

Investment advice Process

What is the process? (5)

A
  • Determine client’s requirements
  • Analyse client’s financial position
  • Formulate a strategy to meet objectives
  • Produce recommendations and implement
  • Revisit investments, objectives and strategy
527
Q

Investment advice process

Know your customer process? (5)

A
  • Knowledge and experience
  • Financial situation
  • Investment objectives
  • Attitude to risk
  • Capacity for loss
528
Q

Establishing the client relationship

Disclosure document includes? (5)

A
  • How financial adviser will be paid
  • The service that will be provided
  • Timescales involved
  • Duration of agreement
  • Frequency of the contract
529
Q

Client agreement

Purpose for the client? (3)

A

Client has understanding of:

  • Amount of reporting on investments
  • Frequency of reviewing client’s circumstances and plans
  • Adviser alerting client to changes
530
Q

Gathering client data

What included in fact find? (7)

A
  • Hard facts - e.g. salary
  • Soft facts - e.g. needs, wants, desires
  • Client’s real objectives - motivation for investing
  • Level of risk they are comfortable with
  • Amount they want/ should save
  • How long they need to invest for
  • Any ethical considerations
531
Q

Gathering client data

What are other important factors? (5)

A
  • Needs and obectives
  • Assets and liabilities
  • Income and expenditure
  • Priorities
  • Attitude to risk
532
Q

Gathering client data

Most important outcome of the fact find? (1)

A

Clear understanding of client’s goals and expectations

533
Q

Attitude to risk

What is it?

A

How much risk they are willing to take

534
Q

Tolerance for risk

What is it?

A

How much variance from their goal they can manage

535
Q

Capacity for loss

What is it?

A

How much they can afford to lose

536
Q

Analysing and evaluating a client’s financial status? (3)

A
  • Asset allocation
  • Ethical investment
  • Taxation as a factor for investment choice
537
Q

Suitability Report

What is included? (7)

A
  • Overview of customer’s circumstances
  • Summary of needs
  • Summary of recommendation
  • Details of their risk profile
  • Details of asset allocation and wrapper
  • Reason why recommendation suitable
  • Costs and risk summary
538
Q

Investment objectives

Considerations? (4)

A
  • Capital preservation
  • Capital appreciation
  • Current income
  • Total return - long term asperations for growth and income
539
Q

Asset allocation

Other considerations before applying? (5)

A
  • Time horizon - if short horizon need greater capital preservation
  • Liquidity - money needed in emergency
  • Tax
  • Legal and regulatory
  • Unique needs and preferences
540
Q

Principles of investment planning

Theoretical approach? (3)

A
  • Backward looking - modern portfolio theory
  • Uses mathematical analysis based on risk/reward
  • Uses efficient frontier
541
Q

Theoretical approach to asset allocation

Returns and volatility depend on?

A

Correlation between assets

542
Q

Pragmatic approach to asset allocation?

What is it? (4)

A
  • Forward looking
  • Uses avaerage rates of return
  • Uses historical data on long time periods
  • Pays attention to recent volatility
543
Q

Decumulation

Important factors? (4)

A
  • Initial yield on investments
  • Overall rate of income generated
  • Level of inflation or interest rate
  • Rate of growth in company dividends
544
Q

Sequencing risk

What is it?

A

Withdrawing too much capital during a market downturn - drag on investment growth

545
Q

Stochastic modelling

What is it? (3)

A
  • Set up on set of standard assumptions
  • Apply assumptions to a particular asset allocation
  • Results plaotted graphically showing the statisical distribution of possible outcomes
546
Q

Stochastic modelling

Criticism?

A
  • Uses a mathematical technique to generate a problematic assessment of returns and volatility
  • Greater dependence of assumptions than optimisation models - often a small change in assumption will reslut in large change in output
547
Q

Portfolio optimisation

Key considerations (5)

A
  • Risk
  • Historical data
  • Forecasts
  • Costs
  • Implementation
548
Q

Portfolio optimisation

Assumptions and weakness for risk?

A

Returns do not always follow normal distribution

549
Q

Portfolio optimisation

Assumptions and weakness for historical data?

A

Maybe a poor guide for future performance

550
Q

Portfolio optimisation

Assumptions and weakness for forecasts?

A

May be inaccurate

551
Q

Portfolio optimisation

Assumptions and weakness for costs?

A

Assumes rebalancing which doesn’t take into account transaction costs

552
Q

Portfolio optimisation

Assumptions and weakness for implementation?

A

May use different specific assets

553
Q

Portfolio construction

When making portfolios need to think about? (3)

A
  • Return required
  • Volatility accepted
  • Correlation of assets
554
Q

Portfolio construction

Top-down portfolio construction? (4)

A
  • Determine asset allocation
  • Allocate geographical spread
  • Choose sector weightings
  • Choose stocks
555
Q

Portfolio construction

Bottom up portfolio construction?

Pays no attention to?

A

Select stocks on own criteria - reverse of top-down

No attention to index benchmarks

556
Q

Fund management styles?

What are they? (4)

A
  • Value - company’s value is higher than price placed on market
  • GAARP - companies with long sustainable advantages e.g. quality of management
  • Momentum - being ahead of latest swing of opinions
  • Contrarianism - going against the trend
557
Q

Fund selection

When selecting fund need to consider? (7)

A
  • Fund objectives
  • Costs and charges
  • Strength and reputation of management group
  • Skill and reputation of fund manager
  • Type and structure of fund e.g. open-ended, geared….
  • Fund performance
  • ESG - transparent, diverse?
558
Q

Fund selection

Strength, skill and reputation of fund manager criteria? (6)

A
  • Relevant experience
  • Structure and style of investment
  • Size and access to resources
  • Quality of staff
  • Administration
  • Consistency in strategy
559
Q

Selection of tax wrappers

When determining tax wrappers need to consider? (2)

A
  • Client’s individual tax and financial circumastances
  • Underlying assets in tax wrapper
560
Q

Selection of tax wrappers

Benefits of wrap (platform) account? (6)

A
  • Hold all investments in one place
  • Less paperwork and admin
  • Lower costs and transparent
  • Automatic rebalancing
  • Access to various tax wrapper
  • Asset allocation across wrappers
561
Q

Discretionary management services

Advantage? (1)

A

Have permission to trade without seeking permission on every trade

562
Q

Recommendations and suitability

Need to include? (6)

A
  • Explanation of client’s risk profile and recommended portfolio
  • Fund selection method
  • Explanation of tax wrappers
  • Future reviews
  • Costs
  • Summary of features
563
Q

Portfolio reviews

Investment policy statement includes? (3)

A
  • How portfolio will be managed
  • Overall investment objective
  • Classification of risk
564
Q

Portfolio reviews

Factors affecting investment strategy? (4)

A
  • Legal constraints - e.g. trust deeds
  • Nature of liabilities - proce inflation
  • Cash flow
  • Taxation
565
Q

Portfolio reviews

Reviewing investment policy statement? (4)

A
  • Client circumstances
  • Regulation and taxation
  • Market environment
  • New products and services
566
Q

Portfolio reviews

Client reporting - items reported by investment manager? (4)

A
  • Purchases and sales
  • Summary portfolio valuation
  • General market commentary
  • Recommended changes in strategy
567
Q

Portfolio reviews

Client reporting - timing and frequency of reports under Mifid II? (2)

A
  • Under Mifid II every 3 months and breakdown of costs?
  • If portfolio falls by 10%
568
Q

Portfolio reviews

Client reporting - reasons for suitability? (4)

A
  • Change in client’s objectives
  • Market conditions
  • Client instructions from client
  • Consistent underperformance
569
Q

The performance of investments

Important to know past performance for? (4)

A
  • Understanding investment markets generally
  • Assessing competence of fund managers
  • Rewarding investment managers
  • Charging performance related fees
570
Q

Past performance

Limitations of using past performance for predictive purposes? (3)

A
  • Equities tend to outperform fixed interest but periods when this isn’t the case
  • When predictions more specific, the value of past performance seems to diminish
  • Most systems use past performance to select funds but depends on future correlation and volatility
571
Q

Performance measurement

What is it?

A

Calculation of the investment return over a stated period

572
Q

Performance evaluation

What is it concerned with? (2)

A
  • Has the investment manager added value by meeting or outperforming a suitable benchmark
  • How the investment manager achieved the calculated return (e.g. by taking high or low risks, or having a particular stock or asset strategy
573
Q

Holding period return

What does it calculate?

A

Calculates return on an investment over period of time it is held, expressed as a % of initial investment

574
Q

Holding period return

Formula?

A

R = D + V1 -V0 / V0

R = rate of return

D = Income paid to the investor during the term

V1 = value at end

V0 = value at start

575
Q

Money weighted return

What is it?

A

Calculates return on investment over a period if new money is added or taken away

576
Q

Money weighted return (MWR)

Formula?

A

D + V1 - V0 - C

Divided by

V0 + (C x n + 12)

C = cash withdrawn or introduced

n = number of months remianing in the year after cash added or withdrawn

577
Q

Money weighted return

Drawback?

A

Not appropriate when comparing different portfolios

  • because strongly influenced by timing of cash flows
  • this is outside fund managers control
578
Q

Time weighted return

What is it?

A

Attempts to eliminate distortions caused by timing of new money by breaking period down to sub-periods for each contribution or withdrawal

579
Q

Time weighted return

Formula?

A

1 + R = (1 + r1) (1 + r2) (1 + r3)……(1 + rn)

R = TWR and

ri = holding period return in each sub period

TWR = V1/ V0 x V2/ (V1 + C) - 1

580
Q

Sharpe ratio

What does it measure?

A

Excess return for every unit of risk that is taken to achieve return

581
Q

Sharpe ratio

Used to compare?

A

Active funds against each other - only funds with similar objectives

582
Q

Sharpe ratio

Formula?

A

Return on the investment - risk-free return

Divided by

Standard deviation of the return on the investment

583
Q

Sharpe ratio

Desirable to measure over what period?

A

Over shorter periods (e.g. monthly)

584
Q

Sharpe ratio

Interpreting the ratio - the greater a sharpe ratio?

A

Better return on investment compared to risk

585
Q

Alpha

What is it?

A

Difference between the return you would expect from a security, given its ß, and the return it actually produced

586
Q

Alpha

Measures what part of return?

A

Cannot be explained by movements in overall market

587
Q

Alpha

Quantifies?

A

Value added or taken away by a manager through active management

588
Q

Alpha

Formula?

A

a = actual portfolio return - [Rf + ßi (Rm - Rf)]

Rf is the risk-free rate of return;
Rm is the market return; and
ßi is the beta of the fund or portfolio

(Calculate the inner brackets first)

589
Q

Information ratio

Evaluates?

A

Portfolio performance in relation to performance of a benchmark

590
Q

Information ratio

Is often used to do what?

A

Gauge the skill of fund managers and shows the consistency with which a manager beats a benchmark index

591
Q

Information ratio

Formula?

A

Rp - Rb

Divided by

tracking error

592
Q

Information ratio

If positive information ratio?

If negative information ratio?

A

Positive - Performance better than benchmark, higher value added by active management

Negative - Investor would have been better off matching index using a tracker or index fund

593
Q

Performance attribution

What is it?

A

Evaluates how managers achieve returns

594
Q

Performance attribution

Factors? (4)

A
  • Asset allocation
  • Stock selection
  • Market timing
  • Risk - may take more or less risk than the benchmark depending on market view
595
Q

Performance evaluation

Steps? (5)

A
  • Establish benchmark
  • Benchmark asset allocation
  • Benchmark returns - return it would achieve if performed in line with index
  • Comparison of asset allocation
  • Stock selection or sector choice - compare index performance for each asset class with managers actual performance
596
Q

Indirect investments

Examples of income? (4)

A
  • Pension income
  • Distribution from fixed interest collectives
  • Distribution from equity collectives
  • Investment bonds
597
Q

Tax Wrappers

3 stages?

A
  • How initial investment treated
  • How funds are taxed within wrapper
  • How proceeds are taxed on investor
598
Q

Taxation

ISAs?

A

Interest and dividends paid gross

No CGT

599
Q

Tracker funds

Types? (3)

A
  • Full replication - fund fully replicates the index
  • Stratified sampling - fund holds a sample of shares in index as not suuficent assets for full replication therefore holds specific company in each sector
  • Optimisation/ synthetic - fund buys and sells shares as index using computerised model
600
Q

Tracker funds

Advantages? (3)

A
  • Lower costs
  • Hard to beat index
  • If fund managers do beat index it’s usually often by taking more risk
601
Q

Tracker funds

Disadvantages? (3)

A
  • Following market can be a rollercoaster
  • Can never index - costs/ tracking error
  • Mergers can distort index
602
Q

Ethical funds

Types? (3)

A
  • Negative screening - fund will avoid certain unethical practices
  • Positive screening - fund allows for some tolerance to unethical practice but will seek out ethical options
  • Neutral approach - firms considered to be socially responsible

R02 (1 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions