Section One: Cash Investments Flashcards
When an investor receives a return on cash it is in the form of what?
Interest
What can the rates of interest be on cash?
Fixed or Variable
With Variable it’s linked to the banks own base rate which in turn is influenced by the BoE base rate.
What is mean by the “effective rate of return”?
Accumulated compound interest over the course of a year
regarding cash investments - so money in the bank -Income is mot likely to be paid net or gross of tax?
Net - investor declares through Self Assessment - check this!
Regarding cash investments - as there is no exposed risk of investment there is no potential for what?
growth of capital - therefore inflation erodes the value over time.
Cash investments can be easily realised making them…
liquid
Why are bank accounts with restrictions on access riskier than instant access accounts for investors?
Because it makes it harder for the investor to move money around and take advantage of better rates or to respond to changes in a banks credit rating.
What are the two different types of account with restrictions on access?
- Fixed Term Accounts
- Notice Accounts
What is another name for fixed term accounts and what are they?
bank or building society ‘‘bonds” or simply as account with tie-ins.
Investors get a better rate of interest in exchange for leaving their money in for a set term - such as 1 - 2 years.
What is a notice account?
For a higher rate of interest, investors have to give notice before withdrawing funds - e.g. 30 - 60 days or possibly a limited number of withdrawals per year.
Can an ISA be held jointly?
No
What are structured deposits?
They often take the form of “guaranteed investment account” and pay interest based on the performance of a an index such as FTSE 100.
Most bank accounts pay interest reflecting market interest rates. Structured deposits pay interest based on the performance of an equity index (usually the FTSE 100).
The typical structure offers the investor a return over a fixed term, which is the greater of:
• their original investment; or
• a percentage (e.g. 110%) of the change in the FTSE 100
What is the only guaranteed element in a structured deposit?
The return of capital
What rush odd involved in holding cash overseas?
Unfavourable Exchange rates
Deposit takers ability to repay any capital
What is the purpose of the NS&I
Essentially a form of government borrowing
NS&I Direct ISA
What is min subscription?
Available…
Interest is…
£1
Online or on the phone only
Variable & tax free
NS&I Junior ISA
What is min/max subscription?
Interest is…
£1-£9k
Tax Free
NS&I Certificates - are they available?
Not currently - but for maturing certificates - all or part of the maturing balance can be renewed.
What are the two types of NS&I certificates? And what are their features?
Fixed interest - lump sum investments, paying interest over a fixed term. Where the investment is held to the full term withdrawals can be made with no penalty. Before this point, a penalty of 90 days interest will be charged.
Index linked – offer a rate of return linked to inflation. So guaranteed return in real terms. Interest is accrued for each month certificate is held though and again a penalty of 90 days interest is charged on withdrawals before the term is completed.
How many days interest will be charged if an NS&I certificate is withdrawn before the end of the term?
90 days interest
How are NS&I guaranteed growth bonds paid / taxed?
They are paid gross, but are taxable
Are NS&I guaranteed growth funds currently available?
No
What do NS&I guaranteed growth bond do? What is the minimum and maximum investment per person per issue?
They pay a guaranteed fixed return on holdings over a choice of terms.
The minimum investment is £500 and the maximum is £10,000 per person per issue.
From what age can an NS&I guaranteed growth bond be had and cannot be held jointly?
16 and yes
What do NS&I income bonds do?
From what age can you have one?
What is the minimum and maximum investment?
What are the penalties and notices associated?
They pay a regular variable rate of monthly interest.
They can be held by anyone over the age of 16 - they can also be held by trustees for someone else.
Minimum investment is £500. Maximum investment is £1 million sole or £2 million joint.
Regarded as easy access withdrawals can be made with no notice and no penalty.
Interest is paid gross but is taxable in full.
What are green savings bonds and what do they do?
They are online savings bond for individuals, age 16 or over.
Pisa fixed interest over a three-year term which is paid gross, but is taxable .
What are the two bank accounts offered by the NS&I?
Investment accounts and direct saver accounts
What are the features of investment bank accounts from the NS&I?
Minimum investment £20 maximum investment £1m sole or £2m joint.
No notice for withdrawals
Interest paid gross, but taxable in full
Postal only
What are the features of the direct saver bank account from the NS&I?
Internet or phone only
Minimum £1
Maximum £2 million sole or £4 million joint.
Interest paid gross, but taxable in full
What is the acronym for remembering what the tax-free NS&I products are?
PICK
Premium bonds
ISA
Certificates
Kids (Junior) ISA
What is investment into cash products also known as?
A money market investment
What does the money market allow deposit takers and the government to do?
Raise money from each other in the short term
Name the three types of instruments used in the money market?
Treasury bills
Certificates of deposit
Commercial bills
What are Treasury bills?
They are short-term money market instruments with terms from 1 to 12 months.
Who manages Treasury bills and who uses them and what for?
Managed by the debt management office
Used by the government for their own purposes
How do Treasury bills work?
Bills are issued out below their face value, and then redeemed at face value to give the return - they don’t pay interest.
The face value is known as the par.
Treasury bills are backed by the UK Government, are short-term and are highly liquid.
They are therefore deemed risk-free cash investments. Their prevailing rate of return is often used as the benchmark ‘risk-free rate of return’ when measuring the risk premium needed for other financial instruments
What is meant by the risk premium?
The return required from investment for taking risk above the risk free rate.
What is meant by the risk free rate?
Treasury bills are also known as “risk-free cash instruments” because they offer risk free returns
This risk free rate of return is often used when measuring the risk/return on other investments .
What are certificates of deposit and what are the features?
Certificates of deposit away banks/building societies, raise money against the deposit stay hold.
They offer fixed rates of interest, which is paid on maturity and over a fixed term - typically 1 to 3 months.
No withdrawals are allowed before the end of the term.
Yields depend on the credit rating of the issue and market interest rates.
Certificates of deposit (CDs) are receipts from banks for deposits placed with them.
The deposits themselves carry a fixed rate of interest, usually related to Sterling Overnight Index Average (SONIA). They have a fixed term to maturity and so cannot be withdrawn before maturity. However, the certificates can be traded in the money markets if the investor needs access to the funds before maturity. The yields on CDs are slightly less than on an ordinary deposit because of the added benefit gained from being able to trade the CD and so, access the capital. Most are issued with maturities of one to three months, with the interest paid on maturity.
Banks and building societies issue CDs to raise funds to finance their business activities, and the yield will depend upon market rates and the credit rating of the issuing bank or building society.
Can certificates of deposit be traded?
Yes, which adds a level of liquidity
What are certificates of deposit interest rates usually related to?
The Sterling Overnight Index Average (SONIA)
What are commercial Bills?
Companies raising money to fund day-to-day operations.
Work similarly to Treasury bills, but as they are not government backed they are not as liquid or as safe.
This means that yields are typically higher than the equivalent treasury bill.
What are money market funds and what are the two types?
Money market funds, our funds that invest in cash instruments and money market investments.
The two types are short-term funds and standard funds.
What must short-term funds have?
- Weighted, average, maturity of no more than 60 days.
- Weighted, average life of no more than 120 days.
What are the two types of money market fund based on?
The maturity and life of the underlying assets.
What must standard money market funds have?
- Weighted, average, maturity of no more than six months.
- Weighted, average life of no more than 12 months.
When looking at money market funds, what needs to be factored into a suitability assessment, versus just a pure cash investment?
With a money market fund, there is likely to be a small annual charge of around 0.15% per annum.
What are the risks associated with keeping money in cash?
Inflation risk
Risk of provider failure (default risk)
Interest rate risk
Currency risk and country risk
What is the most widely used measure of inflation?
CPI
What is interest rate risk?
Where the rate of interest is variable, invest faces, the rest of the interest rates will fall.
What is reinvestment risk?
Reinvestment risk happens when you invest in a fixed term deposit and receive interest as income.
When the deposit matures and interest rates have fallen significantly, it is not possible to reinvest the funds at similar interest rates to sustain anywhere near the same level of income.
What are negative interest rates?
Essentially means you are paying the bank for the privilege of running your account. This is already happening in Denmark and Japan.
How quickly to the FSCS look to pay out the majority of claims?
Within seven days - with more complex case is taking longer.
What is the downside to structured deposits?
These products appear to offer a risk-free way to participate in the rise of stock markets.
However, they tend to require a commitment of five years or more, over which time inflation can take its toll and the only guarantee is the original investment.
