Topic 6 Flashcards
What are the four main financial asset classes?
- Cash
- Property
- Equities (eg company shares)
- Fixed interest securities (eg gilts, corporate bonds)
What are the two main reasons for investors placing money in deposit-based savings accounts?
- Security of capital
- Convenience
In what three ways can access be restricted in ‘restricted access accounts’?
- Limiting the number of withdrawals that can be made each calendar year
- Requiring a minimum period of notice to be provided before funds can be drawn (a notice account)
- Specifying an agreed period during which the saver may not access their money (a term account)
Define ‘offshore accounts’
Any investment medium which is based outside the UK in a country that offers a more advantageous taxation of investments.
What is a ‘Gilt’?
Gilts are a form of borrowing by the UK government.
Explain briefly how ‘Gilts’ work
They have a redemption date and coupon:
- Redemption date - The date on which the government must redeem the gilt by paying back its original issue value or par value.
- Coupon - The interest rate payable on the par value of a gilt. It is a fixed rate, paid half yearly, gross but taxable.
- Income from gilts are classed as savings income
- Capital gains made from the sale of gilts are exempt from CGT
- Gilts belong to a category of direct investment called ‘fixed interest securities’
What is ‘cum dividend’ and ‘ex dividend’?
- Cum dividend - The buyer will recieve the next interest payment
- Ex dividend - The previous owner will be entitled to the next interest payment
What are the three categories of Gilts and who issues gilts?
Short dated - less than 7 years
Medium dated - 7 - 15 years
Long dated - 15 years +
They are issued by the UK Debt management office
Briefly explain ‘permanent interest-bearing shares (PIBS)
- Are issued by building societies to raise capital
- Pay a fixed rate of interest on a half-yearly basis
- Interest is paid gross
- Interest is classed as savings income
- They have no redemption or maturity date
- Will provide a fixed income stream
If the issuing building society converts to a bank by ‘demutualising’ the PIBS are converted to ‘perpetual subordinated bonds (PSBs) which are basically the same as PIBS.
Briefly explain what a ‘corporate bond’ is
- It is used by a company to raise funds
- The bond issued with a fixed rate of interest until redemption date
- Load is re paid in full on redemption date
- Usually over a longer term
- Bond can be bought by both institutional and private investors
- Interest is paid rather than dividends
What does it mean and what is it called when a ‘corporate bond’ is secured?
- It is called a debenture
- If it is secured a charge is made on company assets
What is a corporate bond known as if it is unsecured?
Loan stock
What does it mean if a corporate bond is ‘convertible’?
Gives the holder the right to convert the loan into ordinary shares of the issuing company if they choose to.
How is income from the following taxed
Local authority bonds, corporate bonds, PIBS and eurobonds?
They all pay interest gross, so all income is taxed as savings income.
Briefly outline a ‘structured deposit’
- The return is linked to the performance of an index measuring the performance of equities (eg FTSE 100)
- Access to equity based returns with a promise of always getting initial investment back regardless of performance
- Due to less risk, investors probably wont receive dividend payments nor receive the full benefit of any index rise.
