Topic 6 Flashcards
What are the four main financial asset classes?
The four main asset classes are:
- Cash
- Fixed interest securities (e.g., gilts, bonds)
- Equities (shares)
- Property (e.g., buy-to-let).
What are examples of fixed interest securities?
Examples include government bonds (gilts) and corporate bonds.
What is the main characteristic of cash as an asset class?
Cash offers low returns through interest but carries minimal risk to capital.
What is the risk associated with equities?
Equities (shares) have higher risk, and there is no guarantee of income or capital value; an investor could lose all their money.
What is considered a fifth, alternative asset class?
Alternative investments such as fine wine, art, and antiques are considered a potential fifth asset class.
Why is it important to diversify between different asset classes?
Diversifying between asset classes helps balance risk and reward, reducing exposure to volatility in any single asset class and smoothing overall returns.
Why do different asset classes perform better at different stages of the economic cycle?
Each asset class reacts differently to economic conditions; for example, equities may perform well in times of economic growth, while fixed interest securities may provide stable returns during downturns.
How do fixed interest securities compare to equities in terms of risk and return?
Fixed interest securities generally offer lower risk and stable income, whereas equities offer higher potential returns but come with greater risk.
What is the key advantage of cash as an asset class during periods of economic uncertainty?
Cash provides capital security and is easily accessible, making it a safe option during economic downturns, though it offers lower returns.
What is the typical return and risk profile of property as an asset class?
Property provides rental income and potential capital appreciation, but it comes with higher liquidity risk and is sensitive to economic conditions.
What type of returns do alternative investments typically offer?
Alternative investments, such as fine art and collectibles, can provide higher returns, but they tend to be illiquid and high risk.
What is meant by “liquidity” in the context of asset classes?
Liquidity refers to how easily an asset can be converted to cash without significantly affecting its price. Cash is highly liquid, while property and alternative investments are typically less liquid.
Why might an investor choose fixed interest securities over equities?
An investor might choose fixed interest securities for their stability and predictable income, as they tend to be less volatile compared to equities, which have more growth potential but higher risk.
How do changes in interest rates affect fixed interest securities?
Rising interest rates generally reduce the value of existing fixed interest securities because new bonds offer higher returns, making older bonds with lower rates less attractive.
Why might an investor include alternative investments in their portfolio?
Investors might include alternative investments to diversify risk and gain exposure to non-traditional assets that do not always correlate with the performance of traditional markets.
What impact does inflation have on cash as an asset class?
Inflation reduces the purchasing power of cash, meaning the real value of cash returns can decrease over time, especially in periods of high inflation.
Why do people choose deposit-based investments like savings accounts?
People choose deposit-based investments for the security of capital and convenience. Banks and building societies are accessible, and investors seek the low-risk nature of these accounts.
How does inflation affect deposit-based investments?
Inflation erodes the real value of capital in deposit-based investments, especially during periods of high inflation, reducing purchasing power over time.
What happens to deposits if a bank or building society becomes insolvent?
In case of insolvency, investors may be able to reclaim some of their funds through the Financial Services Compensation Scheme (FSCS), which provides protection up to certain limits.
Why are deposit accounts useful for short-term savings?
Deposit accounts are ideal for short-term savings, such as a holiday or a new car, because they offer easy access and liquidity.
What is the purpose of maintaining an emergency fund in a deposit account?
An emergency fund in a deposit account ensures easy access to funds for unexpected expenses, providing liquidity and security.
Why might investors prefer deposit-based investments over higher-risk options?
Investors may prefer deposit-based investments for the low-risk nature and security of capital, even though these accounts typically offer lower returns compared to higher-risk investments like equities.
How does the FSCS protect depositors in case of bank insolvency?
The FSCS provides protection by compensating depositors up to a certain limit (currently £85,000 per individual, per institution), mitigating the risk of total loss in the event of a bank failure.
Why might inertia keep some investors from exploring other investment options?
Inertia can prevent investors from seeking more rewarding opportunities, as banks and building societies are familiar and accessible, making it convenient to leave money in low-risk accounts despite potential for better returns elsewhere.
Why do institutional investors hold part of their funds in deposit-based accounts?
Institutional investors, like pension funds or insurance companies, keep part of their assets in liquid form (e.g., deposit accounts) to ensure they can meet short-term obligations or take advantage of investment opportunities.
What role does liquidity play in deposit-based investments?
Deposit-based investments offer high liquidity, meaning funds can be easily accessed without delay, making them ideal for emergency funds or short-term savings.
How much protection does the Financial Services Compensation Scheme (FSCS) provide for deposit-based accounts?
The FSCS protects deposits up to £85,000 per individual, per institution, in case of a bank or building society becoming insolvent.
What are no-notice deposit accounts?
No-notice deposit accounts allow depositors to access their money at any time without penalties or waiting periods, making them suitable for emergency savings.
Why do some investors prioritize the security of capital in deposit-based accounts despite lower returns?
Some investors value capital preservation over returns, especially in uncertain markets, as deposit-based accounts protect their principal, even if the returns are lower.
How do deposit-based investments compare to equities in terms of risk?
Deposit-based investments have lower risk as they safeguard the principal amount, unlike equities which carry higher volatility and the potential for loss of capital.
Why might institutional investors hold part of their portfolio in deposit-based investments?
Institutional investors may keep a portion of their portfolio in liquid and low-risk deposit-based investments to meet immediate obligations and maintain financial flexibility.
What are the 2 main types of accounts offered by banks and building societies?
The two main types of accounts are:
- Current accounts (for everyday money needs)
and
- Savings accounts (for setting aside money not required for day-to-day spending).
What are the key features of a traditional current account?
Traditional current accounts allow individuals to receive salary payments, use debit cards, and pay bills via standing orders and direct debits. Cheques and overdrafts may also be available.
What is a basic bank account, and who is it aimed at?
A basic bank account is a simplified account designed for individuals, typically those with low incomes or receiving state benefits, who might not qualify for regular current accounts.
It provides access to cash and payments via direct debit but does not offer an overdraft or cheques.
What makes interest-bearing current accounts different from traditional accounts?
Interest-bearing current accounts offer the usual banking features along with interest payments on the balance. Higher interest rates and cashback options may be available, but these accounts often require meeting certain conditions, such as a minimum monthly deposit.
What is an instant access savings account?
An instant access savings account allows immediate access to funds, often with low or tiered interest rates.
These accounts are commonly used for short-term savings or as an emergency fund.
What is a restricted access savings account?
A restricted access account limits the number of withdrawals or requires notice before withdrawals.
In return, it typically offers higher interest rates compared to instant access accounts.
How does the Financial Services Compensation Scheme (FSCS) protect depositors?
The FSCS protects deposits up to £85,000 per investor, per financial institution, in case of bank or building society insolvency.
Why might someone choose a basic bank account over a traditional current account?
A basic bank account is suitable for individuals who may have difficulty qualifying for a traditional current account due to low income or poor credit history, providing them with essential banking services without the risk of overdraft debt.
How do notice and term accounts differ from instant access savings accounts?
Notice accounts require the saver to give notice before withdrawing funds;
while term accounts lock funds for a set period. Both offer higher interest rates than instant access accounts due to restricted access.
Why are higher interest rates typically offered on restricted access accounts?
Banks and building societies offer higher interest rates on restricted access accounts because they can use the funds for a longer period, providing them with more certainty.
Why might someone choose a packaged current account?
A packaged current account offers additional benefits such as insurance or breakdown cover for a fee, making it attractive for those who would otherwise purchase these services separately.
How do high-interest current accounts attract customers?
High-interest current accounts offer competitive interest rates to attract customers, but they often require meeting conditions like minimum monthly deposits or setting up direct debits.
What are the advantages of an instant access savings account for short-term savings?
Instant access savings accounts provide flexibility and liquidity, making them ideal for short-term savings or emergency funds, even though they offer relatively low interest rates.
What are packaged current accounts?
Packaged current accounts are current accounts that offer additional benefits like travel insurance, mobile phone insurance, or breakdown cover for a monthly or annual fee.
How do fixed-term bonds work in restricted access accounts?
Fixed-term bonds lock funds for a specified term (e.g., 1-5 years) with a fixed interest rate. During this term, no access to the funds is allowed, but the trade-off is a higher interest rate.
What is the main difference between a notice account and a term account?
A notice account requires you to give notice (e.g., 30 days) before withdrawing funds, while a term account locks the funds for a specific period without access until the term ends.
Why might someone prefer an interest-bearing current account?
Interest-bearing current accounts offer the benefit of earning interest on balances, making them attractive for individuals who maintain a higher balance and wish to earn a return on their money while having access to current account features.
How does the convenience of mobile banking apps benefit current account holders?
Mobile banking apps provide easy access to funds, enabling users to manage finances (e.g., transfers, direct debits, bill payments) on-the-go without needing to visit a branch.
Why might a saver choose a fixed-term bond over an instant access account?
A saver might choose a fixed-term bond for the higher interest rates offered, as they are willing to lock away their money for a longer period in exchange for better returns compared to instant access accounts.
What is the difference between a passbook and a cash card in savings accounts?
A passbook is a physical record of deposits, withdrawals, and interest for traditional savings accounts;
whereas a cash card allows the account holder to withdraw money from ATMs and sometimes make purchases directly from the savings account.
Can you earn interest on a basic bank account?
Basic bank accounts generally do not pay interest on balances.
Their primary function is to offer access to banking services for those who might otherwise be unable to open a current account.
What happens if you breach the withdrawal limit on a restricted access savings account?
If you breach the withdrawal limit on a restricted access savings account, you may be charged a penalty in the form of reduced interest or no interest for the month or year.
How does the FSCS protect joint accounts in case of bank insolvency?
For joint accounts, the FSCS provides protection up to £170,000 (i.e., £85,000 per person), which can offer additional security for couples or business partners sharing an account.
What is the minimum and maximum investment for NS&I Direct Saver?
The minimum investment is £1, and the maximum is £2 million.
What is the tax treatment for NS&I Income Bonds?
The interest on Income Bonds is taxable, paid gross, and interest is paid monthly.
What is the minimum and maximum investment limit for a Direct ISA?
The minimum investment is £1, and the maximum is £20,000 per year, with tax-free interest.
What are the key features of Premium Bonds?
Premium Bonds are tax-free, with a minimum investment of £25 and a maximum of £50,000.
Instead of earning interest, holders participate in a monthly prize draw with a chance to win up to £1 million.
What is the investment range for Junior ISA?
The minimum investment is £1, and the maximum is £9,000 per tax year, with the account being tax-free.
How long is the term for NS&I Green Savings Bonds, and what is the tax status?
NS&I Green Savings Bonds have a 3-year term, with interest being taxable and paid at maturity. The investment range is £100 to £100,000.
Why might an investor choose Premium Bonds over other NS&I products?
Premium Bonds offer the opportunity for tax-free winnings through a monthly prize draw, with the potential to win large prizes, up to £1 million, although no interest is paid.
What is the minimum investment required for NS&I Income Bonds?
The minimum investment for Income Bonds is £500.
The maximum is £1m
At what age can you invest in a Junior ISA, and what is the maximum investment limit?
A Junior ISA can be opened for those under 18 (but bought by someone aged 16 or over), and the maximum investment limit is £9,000 per tax year.
What is the investment term for NS&I Green Savings Bonds?
The investment term for NS&I Green Savings Bonds is 3 years.
What tax treatment applies to NS&I Green Savings Bonds?
The interest earned on NS&I Green Savings Bonds is taxable at maturity.
What is the maximum prize for NS&I Premium Bonds?
The maximum prize for Premium Bonds is £1 million in the monthly prize draw.
Why might someone choose NS&I Green Savings Bonds over other products?
Someone might choose NS&I Green Savings Bonds because they offer a fixed interest rate for 3 years and support the government’s green spending projects, aligning with ethical investment preferences.
What makes Premium Bonds appealing for investors despite not paying interest?
Premium Bonds are appealing due to the monthly prize draw, with the potential to win tax-free cash prizes up to £1 million, while the investment remains safe with no risk to the initial capital.
What is the advantage of Direct ISAs compared to taxable savings products?
The advantage of Direct ISAs is that the interest earned is tax-free, making them a preferred option for individuals who want to maximize returns without paying tax on their savings.
Why might someone invest in a Guaranteed Income Bond over a Direct Saver?
Someone might choose a Guaranteed Income Bond for the fixed monthly income it provides, especially if they need a reliable source of regular income, whereas a Direct Saver has a variable interest rate.
What restrictions apply to a Junior ISA that don’t apply to other NS&I products?
A Junior ISA restricts access to the funds until the child reaches 18 years of age, providing a long-term savings option for future use, such as for education or other major expenses.
What is the minimum age requirement for NS&I Green Savings Bonds?
The minimum age for investing in Green Savings Bonds is 16.
What happens at the maturity of Green Savings Bonds?
At maturity (after 3 years), the investment in Green Savings Bonds is repaid with the accumulated taxable interest.
How are returns on Guaranteed Growth Bonds paid?
The returns on Guaranteed Growth Bonds are paid as a fixed rate of annual growth over the 1 or 3-year term.
What is the maximum investment limit for NS&I Guaranteed Income and Growth Bonds?
The maximum investment for both Guaranteed Income Bonds and Guaranteed Growth Bonds is £10,000.
Why are Direct Savers managed primarily online or by phone?
Direct Saver accounts are managed online or by phone to keep administrative costs low, allowing NS&I to provide competitive interest rates with flexible access to funds.
How does the lack of access during the investment term affect Green Savings Bonds?
Investors in Green Savings Bonds cannot access their money until the end of the 3-year term, making it a suitable option for those who can afford to lock away their funds for a longer period in exchange for fixed returns.
What are Cash ISAs?
Individual savings accounts (ISAs) are a form of tax-free personal savings scheme.
One form of ISA is cash (also known as a cash ISA): It is a means of obtaining tax-free interest on a bank or buildibg society deposit acount, subject to certain limits and regulations.
What is an offshore account?
An offshore account refers to any investment medium (such as a bank account) that is based outside the UK, typically in countries offering more favorable taxation on investments, such as the Channel Islands, Luxembourg, or the Cayman Islands.
Why are offshore accounts perceived negatively in terms of taxation?
Offshore accounts are often associated with tax evasion, as people may attempt to hide funds from tax authorities.
However, recent legislation ensures that British Crown dependencies and overseas territories exchange financial information with HMRC to prevent tax evasion.
What are the risks associated with offshore accounts?
Risks include currency fluctuation if the account is not denominated in sterling and potential lack of investor protection schemes.
Investors should confirm protection under local regulations before investing.
How is interest on offshore deposits treated in the UK?
Interest on offshore deposits is usually paid gross.
UK residents must declare this income to HMRC and may need to pay tax on it, unless they are eligible for tax relief under a double taxation agreement.
Why might offshore accounts be useful to some investors?
Offshore accounts can be useful for individuals who need money available outside the UK, for example, those owning property abroad or planning to move overseas in the future.
