Self Test Questions Flashcards
What are the main risks of holding cash on deposit?
Inflation risk
Interest rate risk
Default risk
What is the maximum compensation possible under the FSCS to cash depositors?
100% of the first £85,000 per customer
What are the two types of restricted access accounts?
Notice accounts
Term deposit accounts
Once a bond has been issued, any subsequent trading of that bond takes place in which market?
Secondary Market
What does the nominal or par value of a gilt determine?
The price at whcih a gilt will be redeemed at the redemption date
The amount on which the interest will be received is calculated using the Gilts coupon.
What does the interest or running yield measure and what is the formula?
The interest or running yield measures the income return an investor receives on the amount paid for a bond
Coupon/clean price x 100
Which are more volatile: bonds with long periods to maturity and low coupons or those that are short dates with high coupons?
The most volatile bonds are those with a long period to maturity and low coupons.
What is a reverse yield curve and how does it differ from a normal yield curve?
It indicates that yields are lower for longer dated bonds that for short dated - curve falls from left to right. Interest rates may be expected to decline in future.
Do corporate bonds generally offer higher or lower yields than gilts? Explain why.
Corporate bond yields more that the equivalent gilt. There is a higher credit risk and they could become insolvent. Corporate bonds are less liquid and generally have a wider bid-offer spread and the risk ir could not be traded when required.
What two factors tend to influence the price movements of an individual share?
Future expectations
Historic and current knowledge of a company’s performance
Is a rise in interest rates likely to raise or depress the share price of building companies?
A rise is likely to depress builders share price due to increased mortgage costs
To what extent is a preference share comparable to a corporate bond?
Preference shares are similar to bonds in that they pay a fixed income in the form of a dividend that has preference over normal dividends
Preference share dividends are taxed as dividend income and not at the savings rate payable on interest
Preference shares are often issued with a redemption date
Which type of share ranks lowest if a company goes into liquidation?
Ordinary shares, as payment of debts and other share classes come first
A client is considering investing in listed private equity companies. What are the risks associated with this type of investment?
High risk of losses as some companies will grow more slowly or fail.
Vunerable to a domestic downturn
Listed private equity stocks are less liquid that other listed stocks, making them more difficult to trade and sell
What is a price-earnings (P/E) ratio and what does it tell an investor about the potential for growth in the share price?
Compares the share price to earnings per share
High PE usually indicates optimism, however does not indicate whether a share price will rise or fall
Why might it be appropriate to include property within an investment portfolio?
Obtain additional diversification
Returns are generally less volatile
as property asset is backed, it can provide long term protection against inflation
What are the disadvantages of investing in a work of art?
Dont generate any form of income cost money to keep Demand is driven by taste Authenticity can be hard to prove High buying and selling costs Difficult to diversify Specialist knowledge
What are the two broad classifications for commodities?
Hard and soft commodities
Why should investors pay attention to political developments?
A governments policy changes can have an impact on economic and financial conditions. Political developments can change the investment climate both for the economy and for individual sectors
Why are international developments increasingly important for investors?
National economies have become increasingly integrated and financial markets move more and more in step, so investors need an international perspective when allocating assets
What are the four main phases or the business cycle?
Recovery, followed by expansion or acceleration of economic growth
Boom
Slowdown or contraction
Recession
How can the business cycle affect the stock market?
Share prices generally begin to recover while the economy is in recession, falter when interest rates are raised to curb inflation in a boom and fall back as the economy slows down
How may a governments fiscal policy affect the behaviour of individuals and companies?
The different tax treatment of different types of asset will influence investment decisions
The tax treatment of a companys earnings will affect its dividend policy and whether it raises captial through debt or equities
What are the two main measures of money supply and what do the comprise?
M0 and M4
M0 - notes, coins, banks operational deposits within the Bank of E
M4 - notes, coins, plus all instant access and deposits accounts of UK residents with UK Banks and societies
What are the effects when the Bank of England reduces short term interest rates?
It eases monetary policy
If the market agrees with the Banks view of inflation, longer term interest rates will fall
This will lead to rising asset prices, wealth will increase making people more willing to borrow and spend, stimulating demand
Low interest rates will encourage more borrowing
Those dependant on income from cash deposits will
be worse off
How does the country’s balance of payments current account affect currency values?
If there is a surplus, in means that the country exports more goods than it imports. Buyers have to acquire the currency to pay for the goods, increasing the country’s foreign reserves and strenghthening the currency
If there is a deficit, it implies the need to sell the local currency to acquire foreign goods
How do exchange rates impact on investments in the domestic and foreign markets?
The value of any profit earned from either investments in overseas markets or from selling products overseas is affected by the exchange rate. The profit may be increased or reduced depending on the exchange rate when it is converted into the domestic currency.
The profitability of their export business affects the value of the shares of exporting companies.
What does standard deviation measure?
The standard deviation measures how widely the actual return on investment varies around the mean or expected return.; The greater the standard deviation, the greater the volatility and expected risk
What does beta measure?
The sensitivity of a security to a market
What type of risk can be eliminates by holding a diversified portfolio?
Non systematic or investment specific risk
Why, in theory, should investment managers construct portfolios that lie on the efficient frontier?
It represents the set of portfolios that have the best risk reward trade offs, so for any level of risk the portfolio on the frontier with that level of risk will give the best return for an investor
What is usually used as representing a risk free asset in the CAPM equation?
Ninety one day treasury bills as there is virtually no risk of default
