Stuff I need to learn Flashcards
What are local authority bonds?
Same as GILTS except it is a local authority issuing the bond instead of the government
A way for a local authority to borrow money
The bonds are secured on the local authorities assets***
Fixed term, fixed interest paid half yearly (like GILTS)
More risky than GILTS
What are permanent interest bearing shares (PIBS)
When is there interest paid?
Why are PIBS more risky than a deposit based investment?
What happens to holder of PIBS in the event of demutualization?
PIBS are a way building societies can raise capital
They are Fixed interest, paid half yearly (same as GILTS and Local authority bonds )
PIBS rank below ordinary accounts in priority of payment in the event the building society becomes insolvent (hence why they are more risky than a deposit based investment)
In the event a Building Society demutualizes ( becomes a bank ) the PIBS are converted to Perpetual subordinated bonds which are basically the same as PIBS ( ie, no redemption or maturity date and pay a fixed income stream )
1) What are corporate bonds?
2) Who can buy corporate bonds?
3) A corporate bonds may be secured or unsecured. Explain what this means.
4) Can corporate bonds be ‘convertible’ and what does this mean?
5) Do corporate bonds pay interest or dividends?
6) One reason debentures are less risky than loan stock is because debentures are secured against the companies assets. What is another reason ( the answer is in relation to what happens if the company is wound up )
7) What is riskier. GILTs or Corporate Bonds?
1) It is one of the ways a company can raise additional money.
It is a form of borrowing by the company. Typically used for a companies long term financial needs.
They offer a fixed interest until redemption date, with the loan repaid in full by the company on redemption date (exact same as GILTS)
2) Corporate bonds are bought by institutional investors (such as life companies and pension funds) and by private investors.
3) If a corporate bond is ‘secured’ it means the bond is secured as a charge against the company assets, meaning if the company defaults on the interest payments or the repayment on redemption date, the creditor (investor) can sell the assets. Secured bonds are known as ‘debentures’
If a corporate bond is unsecured, it just means its not secured against any assets. These are known as ‘loan stock’ . Obvs, they are more risky than ‘debentures’
4) Corporate bonds can be convertible. This just means the bond can be converted into an ordinary share of the company upon request.
5) Corporate bonds pay interest ( remember they work the same as GILTS )
6) In the event the company is wound up debentures rank higher than ordinary share holders and holders of loan stock in terms of payment. Ordinary share holders and loan stock holders rank the same
7) Bonds are riskier (and in return they typically offer higher interest rates than of similar GILTS)
Tell me the main ways in which a company can raise additional money?
The main ways a company can raise additional money is by:
Issuing shares
Borrowing
(The company can borrow from lenders such as banks or issue corporate bonds which is where they borrow from institutional investors (life companies or pension companies) or private investors (like me)
Define ‘loan stock’
Define ‘Debenture’
Loan stock = A corporate bond that is NOT secured against the companies assets
Debenture = A corporate bond that IS secured as a charge against the companies assets. In the event the company can not honor its interest payments or repayment on redemption date the investor can sell the assets to recoup the shortfall (obs less risky than loan stock)
What are Eurobonds?
A Eurobond is a bond issued or traded in a country that uses a currency different to the one in which the bond is denominated.
E.g A Eurobond in Germany,
denominated in US dollars
Eurobonds are a form of borrowing used by multinational organizations and governments.
True or false: Eurobonds only trade in the euro currency and are available only in countries located in the EEA?
False for both
A Eurobond is a bond issued or traded in a country that uses a currency other than the one in which the bond is denominated.
(For example, a UK company might issue a Eurobond in Germany,
denominating it in US dollars)
This means that the bond operates outside the jurisdiction (ie, in a dif country) of the central bank that issues that currency
It is important to note that the term EURO has nothing
to do with the euro currency, and the prefix ‘euro’ is used to refer to deposits outside the jurisdiction of the domestic central bank
What do Local Authority Bonds, Corporate Bonds, Permanent Interest Bearing Shares (PIBS) and Eurobonds have in common in terms of tax treatment
They all pay interest gross and the interest is treated as savings income
What is alternative finance?
Any financial activity or lending that takes place outside of the traditional banking system ( remember as alternative to banks ) such as crowdfunding
What are the 4 different types of crowd funding?
Crowd funding can be donation‑based (contributors do not expect anything in return)
Crowd funding can be reward‑based (contributors expect a reward such as a free trial to a newly developed game)
Crowd funding can be loan based (otherwise known as peer-to-peer lending)
Crowd funding can be investment based
Tell me which of the following statements are true or false:
Reward based crowd funding is regulated by the FCA
Donation-based crowd funding is NOT regulated by the FCA
Loan-based crowd funding is regulated by the FCA
Investment based crowd funding is not regulated by the FCA
Reward based crowd funding is regulated by the FCA (False, it is not)
Donation-based crowd funding is not regulated by the FCA (True)
Loan-based crowd funding is regulated by the FCA (true)
Investment based crowd funding is not regulated by the FCA (false, investment based is regulated)
Loan based crowd funding (peer 2 peer lending) and investment based crowd funding are regulated by the FCA. When offering either of these, what limitations have been put in place?
Firms are only allowed to promote these to experienced
or sophisticated investors, or to ordinary investors who confirm that they will not invest more than 10% of their net investable assets
What is Peer 2 Peer lending?
Is peer to peer lending covered by the FSCS
Peer 2 Peer lending, which is loan-based crowd funding, is where a saver places their money with a P2P lender who will
then lend the money out to businesses that are seeking funding.
Loan-based crowd funding is regulated by the FCA
Firms are only allowed to promote these to experienced or sophisticated investors, or to ordinary investors who confirm that they will not invest more than 10% of their net investable assets
Peer to peer lending is NOT covered by the FSCS so more risk
Where does the risk of Peer 2 Peer lending, or loan based crowd funding, come from?
Savers places their money with a P2P lender who will
then lend the money out to businesses that are seeking funding. Although the P2P lender will complete due diligence on the businesses it lends to, there is a risk the business will default on the loan payments meaning the saver will experience less return
Also, the P2P lender is not covered by the FSCS
Why is crowd funding classed as ‘alternative finance’?
Alternative finance is just any financial activity or lending that takes place outside of the traditional banking system
All the different types of crowd funding do not use banks hence why it is alternative finance
What is investment-based crowd funding?
Is investment based crowdfunding regulated by the FCA
What does the FCA state about investment based crowdfunding on its website?
Investors invest their money typically in exchange for a share of a company or a return on their investment.
Investment‑based crowd funding platforms enable lots of small investors to pool their funds in one or more start‑up companies
It IS regulated by the FCA like Loan based is
On its website, the FCA advises that these investors are very likely to lose their investment given the significant risk of a start‑up company going bust and the shares becoming worthless
What are the 4 main asset classes ( and the possible 5th one)?
Cash
Fixed interest securities (eg gilts, corporate bonds)
Equities
Property
Possible 5th asset class is ‘alternative investments’,
which would include things such as fine wine, works of art or antiques
LOOK AT FIGURE 6.1 AT BOTTOM
Define ‘Securities’
Financial assets that can be traded.
They can be divided into two broad classes: those that represent ownership (equities) and those that represent debt (such as gilts and corporate bonds)
What is Over The Counter trading?
What directive introduced strict requirements around OTC trading?
Normally, where institutions trade large amounts of securities Ie equities, bonds etc) with little publicity about the price paid or the company (or companies) whose shares are being
traded.
This form of trading is sometimes called ‘dark pools
MiFID II introduced stricter requirements around OTC trading. It introduced more reporting requirements to reduce OTC trading( ie more transparency)
What is earnings per share
What is dividend cover
What is price/earnings ratio
Earnings per share = The company’s post‑tax net profit divided by the number of shares.
Dividend cover = how much of a company’s profits are paid out as dividends. The higher the dividend cover the better.
What is earnings per share
Earnings per share = The company’s net profit divided by the number of shares
Shows how much money a company makes or ‘earns’ for each share
What is dividend cover
Dividend cover = how much of a company’s profits are paid out as dividends
E.g. If a company pays 50% of its profits to honor its dividends the dividends cover is 2.0, because the dividend payments are covered twice.
If the same company pays 25%, it would be 4.0 (which means it is making more profits so it can cover its dividend payments more)
If a company pays 200% of its profits in the year, it would be 0.5 ( this is bad because it means to honor its dividends payments the company is using retained surplus profits from previous years. This means it is not making enough profits in the current year. Obs this can only go on for as long as how much retained surplus profit the company has from previous years…
Investors ideally want dividend cover to be 2.0 or higher. Dividend cover of 1.0 or less is a big no no for investors
What is price/earnings ratio
The price/earnings (P/E) ratio is calculated as the share
price divided by the earnings per share
- Remember, Earnings per share = The company’s post‑tax net profit divided by the number of shares
It is generally considered to be a useful guide to a share’s growth prospects
A share that has a high P/E ratio compared with other shares in the same category is in demand.
Tell me one of the main benefits of owning agricultural property in relation to tax
You get an agricultural relief for inheritance tax
100% inheritance tax relief for owner-occupied land
50% where the owner has let out the land
What are treasury bills?
How do they differ to GILT
Treasury bills are short‑term redeemable securities issued by the Debt
Management Office (DMO) of the Treasury
Like GILTs, they are a way the government can raise funds but they differ to GILTs two main ways which are:
Treasury bills are short-term (normally issued for 91 days). GILTs generally are much longer terms
Treasury bills are zero‑coupon securities
(they do not pay interest). Instead, they are issued at a discount of their par value which is where the investor makes their gain.l
Briefly describe treasury bills
Short‑term redeemable securities
issued at a discount to their par
value. Also known as T‑bills
They are literally GILTS except they are short term and they do not offer a coupon
The way the investor makes the money from the T-Bill since they do not offer interest is that the coupon is offered at a discount to its par value ( the amount paid back by the gov on redemption )
E.G For example, a Treasury bill may be issued for £9,850 with a ‘par value’ of £10,000. The investor makes a guaranteed £150 on their £9,850 investment over 91 days
What is commercial paper?
For a business who needs to borrow for working capital purposes ( in short term )
Commercial paper offers cheaper borrowing opportunities for
companies that have good credit ratings
companies with lower credit
ratings can issue commercial paper if it is backed by a letter of credit from a
bank that guarantees (for a fee) to make repayment if the issuer default
Most commercial paper is issued for periods of between 5 and 45 days, with an
average of around 30 to 35 days
What are money-market-instruments?
Money‑market instruments’ is a generic term used to describe a number of
forms of short‑term debt
3 types are treasury bills, commercial paper and certificates of deposits
What are certificates of deposits (CDs)?
A product offered by banks and building societies where u are required to make a substantial deposit (normally over 50k ) for a fixed period at a fixed rate of interest. They offer a higher interest rate in return
Terms are typically three
months or six months
Significant penalties for withdrawals before the end of the term
Basically like bonds but because CD’s are ‘bearer securities’ they can be sold to a third party if the depositor needs the funds before the end of the term
What is private residence relief?
A relief that applies to CGT
Available when someone sells the property they have lived in as their main or only residence
It is a full relief so those who are eligible do not pay any CGT
What is business asset disposal relief?
What is the requirement for owners of limited companies for them to be eligible for business asset disposal relief?
A relief that applies to CGT for businesses
It is for business owners who are required to pay CGT when they dispose of assets used in their business (ie machinery)
It is a partial relief so those who are eligible pay a lower rate of CGT rather than not pay all of it like with private residence relief
For owners of limited companies, eligibility depends on holding at least 5%
of the ordinary share capital of the business. In addition, they must also be entitled to at least 5% of the distributable profits and net assets of the
company
What is roll over relief?
What is the timeframe for roll over relief to apply?
A relief that applies to CGT for businesses
Roll‑over relief may be claimed if the business assets disposed of are replaced by other business assets
This means that, instead of CGT falling due on the original disposal, it is deferred
until a final disposal is made ( hence rolled over )
The replacement asset must be bought within a period of one year before and
three years after the sale of the original asset
What is Hold Over Relief?
A relief that applies to CGT for gifts
Allows any CGT on any gain arising on the gift of certain assets to be
deferred until the recipient disposes of it
What is corporation tax and who is subject to it?
Corporation tax is paid by limited companies on their profits. It is also
payable by clubs, societies and associations, by trade associations and
housing associations, and by co‑operatives.
It is not paid by conventional business partnerships or limited liability partnerships, or by sole traders: these are all subject to income tax
What are venture capital trusts and why were they introduced?
What tax benefits do VCT’s offer?
Who approves venture capital trusts?
Venture Capital Trusts were introduced by the government to incentivise private investors to invest in newly established companies. It incentivises investors becomes of its tax benefits
A Venture Capital Trust (VCT) is a company whose shares are listed on the stock exchange. it is run by an investment manager. The VCT normally spreads the monies raised from investors over a range of different companies
Tax reliefs are as follows:
Income tax relief up to 30% is given on an investment of up to £200,000 per tax year
Any dividends paid by the VCT from the £200,000 permitted maximum
investment are tax free
Any capital gains are exempt from CGT
Venture capital trusts must be first approved by HMRC ( because of tax shit )
What are enterprise investment schemes and why were they introduced?
What tax benefits to EIS offer?
What are seed investment schemes?
Like venture capital trusts, enterprise investment schemes were introduced by the government to incentivise private investors to invest in newly established companies. It incentivises investors becomes of its tax benefits
An EIS involves a direct investment into a company that is eligible for the scheme
The tax reliefs offered are as follows:
Income tax relief up to 30% is given on an investment of up to £1,000,000 (£2,000,000 if the amount invested in excess of £1,000,000 is made in ‘knowledge‑intensive companies’) per tax year
The CGT on any capital gains that are reinvested is deferred
Capital gains from investment in the EIS are exempt from CGT, provided
that the EIS shares have been held for at least three years
Seed Enterprise Investment Scheme (SEIS), offers even higher tax reliefs than EIS, as it is targeted at raising funds for small
start‑up companies ( hence seed )
What is the main differences between a venture capital trust, an enterprise investment scheme and a seed enterprise investment scheme
What are their main similarity
A VCT is a listed company that invests into companies on behalf of the investor
An EIS involves a direct investment in a company that is eligible for the scheme
A SEIS involves direct investment in a company that is eligible for the scheme, but the companies start-ups so are more risky but in return the tax benefit is greater than an EIS
Similarity: They all offer respective tax benefits to investors and were introduced by the government to encourage investors to invest in smaller or establishing companies
What are class 2 and class 4 NIC contributions
Class 2 = Flat rate contribution paid by self employed. Collected through self assessment in a single lump sum
Class 4 = Additional Contributions paid by self employed in half yearly installments by self assessment
search a youtube vid for context
What are bearer securities?
Certificate of deposits are an example of a bearer security. It is why they can be sold to a third party
What is an agent?
Who is the principal ?
What is apparent authority?
What is ratisfication?
What is realty?
What is personalty?
Explain joint tenants
Explain tenants in common
Realty = (also know as real estate) . Property that is immovable.
Personalty = all other property besides realty
Joint tenants = each joint owner owns 100% of the property . On death of one the surviving joint owner will automatically take legal ownership and cannot be overridden ( such as by a request in the will )
Tenants in common = Each owner has a set amount of equity in the property. If one owner dies their portion or share in ownership passes to whoever is entitled to inherit it
What is enduring POA?
What is lasting POA
Who must POA be registered with?
Who is the Donor?
Who is the Donee?
What happens if no POA is in place?
EPA automatically ceases if a person becomes mentally incapacitated. It can be revoked at any time by the court of protection
LPA has now replaced EPA. All new arrangements must be LPA. There are two types if LPA:
health and welfare (only uses if no mental capacity)
property and financial affairs (can be used with/without mental capacity)
Any POA registration must be registered with the Office of the Public Guardian
Donor = person who makes POA
Donee = (also known as attorney) person who is given POA
If a person loses mental capacity and does not have a valid LPA or EPA in place, the Court of protection can appoint a ‘deputy’. Deputy’s are much more restricted.
Tell me the following key terms in relation to wills:
Testator
Beneficiary
Codicil
Executor
Grant Of Probate
Deed of Variation
Money’s Worth
Intestate
Administrator
Letters of administration
Testator = person who makes the will
Beneficiary = the person who receives the benefits under the terms of the will
Codicil = document that amends a will ( must be by the testator and before they have died )
Executor = person named by the testator as being responsible for carrying out the wishes if the will
Grant Of Probate = legal authority for the executors to distribute the will
Deed of Variation = legal agreement by all beneficiaries to alter the terms of the will, after the death of the testator (commonly used for tax purposes) . Must be done with 2 years upon death of testator and HMRC must be informed within 6 months of it being used
Intestate - death without leaving a valid will
Administrator - person who is given the role of distributing the estate according to rules of intestacy
Letters of administration = legal authority given to the administrator to distribute the estate of a person who has died without a valid will
What is a trust also known as?
Who is the settlor?
What is a trust deed?
Who is the trustee?
What is trust property?
A trust is also known as a settlement
The settlor is the person who creates the trust and originally owned the assets held within it
Trust deed = document that sets out how the trust should be managed, by whom and for whose benefit
Trustee = person named in the trust deed as the legal owner of the trust property. They have the responsibility you look after the estate in accordance with the trust deed
Trust property is the assets in the trust that are under the legal ownership of the trustees. The settlor originally owner the trust property.
Outline the following definitions when it comes to insolvency and bankruptcy
Insolvency
Bankruptcy
Individual voluntary arrangement
Company voluntary arrangement
Official receiver
Insolvency practitioner
Official receiver = appointed by courts
to possess and dispose of the bankrupt persons assets in order to pay off the creditors- clothing, household items and work related items CANNOT BE SEIZED
What are individual voluntary agreements
Who must supervise this arrangement
IVA’s are alternative to bankruptcy for individuals
The debtor arranged with the creditors to reschedule the repayments of the debt. IVA firms can often arrange with the creditor that part of the debt is written off in return for repayment of the remaining debt (this is better for a creditor than writing the debt off in full or selling the debt to a debt recovery firm)
Set up by creditors who represent 75% of the debt in the arrangement
Individuals with an IVA will find it difficult to arrange credit
This arrangement must be supervised by an insolvency practitioner
A positive of declaring bankruptcy is that it allows people to have a fresh financial start. What is the downsides ?
What is the company equivalent to an individual voluntary arrangement ?
Who sets them up?
A company voluntary arrangement
For companies in temporary financial difficulty
Set up by the directors of a company or by a liquidator. NOT SET UP BY CREDITORS
Like IVA creditors representing 75% of the company debt must agree to it
