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Cemap1 > Topic 6 > Flashcards

Topic 6 Flashcards

1
Q

What are the 4 financial asset classes

A

Cash
Property
Fixed intrest securities (gilts, Corporate bonds)
Equities (company shares)

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2
Q

What is generally advised to investors in regards to asset classes

A

It is generally advised investors should diversify between different asset classes to manage risk reward

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3
Q

What is the most popular type of direct investment

A

It is a deposit account and the most familiar example of this is a bank’s savings account

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4
Q

What are the 2 main reasons that the most popular type of direct investment is a deposit account

A

Security of capital there is a very low risk to capital if the institution goes insolvent then capital can be lost however up to 85000 pound is covered by the financial services compensation scheme a bigger risk is inflation eroding the value of capital

Convenience it is extremely easy to access and open savings accounts with banks

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5
Q

What is a basic bank account

A

Basic bank accounts are simplified current accounts methods of Withdrawing are limited to atms and Post Office

No check books or overdrafts are available for these accounts

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6
Q

What are basic bank accounts designed for

A

They are designed to encourage people who have previously not had an account to open one this is typically those on low income or benefits

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7
Q

What is an interest bearing current account

A

It is a current account that pays interest investors have immediate access to their funds without loss of interest some interest bearing current accounts also offer cashback

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8
Q

What is a packaged current account

A

Package current accounts offer a range of benefits such as breakdown cover phone insurance travel insurance normally for a monthly or annual fee

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9
Q

Why do restricted access accounts tend to have higher rates of interest

A

If access to an account is restricted the provider has certainty that the funds are available to them for a longer period of time

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10
Q

What methods Of restriction are available for restricted access accounts

A

Limiting the number with drawers that can be made each calendar year

requiring a minimum period of notice to be provided before funds can be drawn (notice account)

Specify an agreed period During which the saver may not access their money (term account)

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11
Q

What is a notice account

A

A notice account requires a minimum period of notice to be provided before funds can be drawn

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12
Q

What is a term account

A

Specifying an agreed period During which the saver may not access their money

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13
Q

What normally happens when a saver breaches the notice requirements on a notice account

A

The saver will normally receive substantially less interest or 0 interest for doing so

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14
Q

What is a fixed term bond

A

A fixed term bond offers a fixed rate of return but typically there is no access at all to savings during the term

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15
Q

National savings and investments products are backed by who

A

The government

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16
Q

What national saving and investment product is no longer available

A

Guaranteed income bonds and guaranteed growth bonds new bonds are no longer available for sale holders of existing bonds can renew them for a new term or cash them in

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17
Q

What is meant by the term offshore

A

Offshore term is usually applied to any investment medium which is based outside the uk that offers a more advantageous taxation of investments such countries are sometimes referred to as tax havens

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18
Q

Why do offshore investments expose an investor to a higher risk compared to similar onshore investments

A

The account may not be Stirling meaning to convert back to Stirling maybe costly

Not all offshore accounts are protected by investor protection schemes

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19
Q

How is interest paid on offshore investments

A

Interest is paid gross UK residents must declare this income to hmrc and may have to pay tax

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20
Q

What category of direct investment do gilts belong to

A

Fixed interest securities

21
Q

What are gilts a form of

A

They are a form of borrowing by the UK government

22
Q

What is a redemption date

A

The date on which the government must redeem the guilt by paying back its original issue value or par value normally quoted as a nominal 100 pound

23
Q

What is a coupon

A

The interest rate payable on the par value of a guilt it is a fixed rate paid half yearly gross but taxable

24
Q

What are the 3 categories of gilt

A

Short
Medium
Long

25
Q

What are the time frames for short medium and long guilts

A

Short- 1-5 years
Medium - 5-15 years
Long 15 years +

The uk debt management office which issues guilts defines short and medium guilts as follows
Short - less than 7 years
Medium - 7-15 years

26
Q

What are index linked gilts

A

Index linked guilts are where the interest payments and the capital value move in line with inflation this means an investor’s purchasing power of their capital and interest recieved remain constant unlike all other then unlike all other fixed interest investments where inflation erodes power

27
Q

When are new gilts normally issued?

A

New issues of gilts are made periodically often when an existing issue has reached redemption date.

28
Q

Can GILTS be sold?

A

Yes, to other investors prior to redemption date.

29
Q

What factors determines the price of a gilt being sold?

A

The level of market intrest
The amount of time left to redemption date
Supply and demand

30
Q

How are gilt prices quoted?

A

Cum dividend
Ex dividend

31
Q

Define companies dividend and ex dividend

A

Cum dividend - The buyer acquires the stock itself and the entitlement to the next interest payment

Ex dividend - The buyer acquires the stock itself but the next interest payment will be payable to the previous owner

32
Q

How is gilt intrest paid

A

Interest is paid gross without the reduction of tax but investors can elect for net payment

33
Q

What is gilt income classed as?

A

Savings income

34
Q

Are gains made from the sale/redemption of GILTS subject to capital gains tax?

A

No, gilts are entirely free of capital gains tax

35
Q

What is a local authority bond

A

Local authorities can borrow money by issuing stocks or bonds which have fixed term they are secured on local authority assets and offer a guaranteed rate of interest paid half yearly these are not quite as secure as GILTS

36
Q

What are permanent interest bearing shares

A

Permanent interest bearing shares are issued by buildings societies to raise capital they pay a fixed rate of interest on a 1/2 yearly basis

37
Q

Where do permanent interest bearing shares rank in case of insolvency

A

Permanent interest bearing shares rank below ordinary accounts in priority of payment

38
Q

What happens to permanent interest bearing shares if a building society converts to a bank

A

The permanent interest bearing shares it has issued Are converted to perpetual subordinated bonds these bonds these are similar to permanent interest bearing shares in that they have no redemption or maturity date and will provide a fixed income stream

39
Q

What are corporate bonds generally used for

A

They are used for a company to raise funds to finance its activities they are good for long term financing

40
Q

How are corporate bond similar to guilt

A

They will pay a fixed rate of interest until redemption date with the loan repaid in full at redemption date

41
Q

How is a corporate bond secured

A

If secured a charge is made on company assets this means the assets could be taken by the creditor and sold in the event of the company defaults

42
Q

A corporate bond that is backed by security is typically referred to as what

A

Debenture

43
Q

A corporate bond that is not backed by security is referred to as what

A

Loan stock

44
Q

Can corporate bonds be convertible

A

Yes some corporate bonds are convertible to ordinary shares of the issuing company. There is no obligation to do so

45
Q

What does a corporate bond pay

A

Interest rather than dividends is payable

46
Q

What is a eurobond

A

A euro bond is a bond issued or traded in a country that uses a currency other than the one in which the bond is denominated this means that the bond operates outside the central bank that issues the currency

47
Q

What is a structured deposit

A

With a structured deposit the return paid is linked to the performance of an index such as FTSE100. The investment is normally arranged over a fixed term

48
Q

What does alternative finance or peer to peer lending involve

A

A saver placing their money with A P2P lender who will provide loans to businesses on your behalf

49
Q

Are peer to peer lenders regulated

A

Yes by the FCA

Cemap1 (25 decks)

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