Topic 6 (Direct Investments)

Question 1

What are the main financial asset classes?

Answer 1

• cash
• fixed interest securities
• equities
• property
• ‘alternative investments’

Question 2

What is the main principle of investment?

Answer 2

The greater the risk presented the greater the potential return

Question 3

Describe the levels of return for CASH

Answer 3

Offers variable but low levels of return through interest with limited risk to capital

Question 4

Describe the levels of return for SHARES

Answer 4

Offer no guarantee with regard to income payments or future capital values

Question 5

What is a deposit based investment?

Answer 5

-where the capital is fixed but the income may vary

Question 6

Name some types of deposit based investments

Answer 6

• bank and building society accounts
• national savings and investment products
• cash ISAs
• offshore deposits

Question 7

Why do investors use deposit based savings?

Answer 7

-capital investment remains intact
-good for short term savings
-readily accessible
-emergency funds (no notice deposit account)
‘Rainy day money’

Question 8

What are the 2 types of interest bearing accounts?

Answer 8

1. Current accounts (everyday money)

2. Savings accounts (money that’s set aside)

Question 9

What is a traditional current account?

Answer 9

An account where an individual can have their salary/wages paid

Question 10

What accounts can arrange an overdraft?

Answer 10

A transactional current account can have an overdraft but a basic bank account cannot

Question 11

What is a basic bank account?

Answer 11

A simplified current account which is typically aimed at those on low incomes

Question 12

What is an interest bearing current account?

Answer 12

Provides investors with immediate access to their funds without any loss of interest

Question 13

Explain the rates of interest for a bearing current accoung

Answer 13

Account are offered by banks that offer a higher rate of interest but will require higher minimum level of investment (1,000-10,000)
This account is free of charge

Question 14

What is a packaged current account?

Answer 14

Offers a range of ancillary benefits such as breakdown cover, mobile insurance, travel insurance in return of a monthly fee

Question 15

Give some features of an Instant access savings account…

Answer 15

• opened with as little as £1
• immediate access
• few limitations
• low interest rate
• good for short term emergency funds

Question 16

What are the rates like for Restricted accounts?

Answer 16

The provider has certainty that the funds are available to it for a longer period so therefore rates are higher

Question 17

Give examples of how access maybe restricted…

Answer 17

• limiter amount of withdrawals
• minimum period of notice
• specifies term agreed at outset

Question 18

What is a fixed-term bond?

Answer 18

Offers a fixed rate of return if money is saved for a fixed term

Question 19

What is ‘Deposited protection’?

Answer 19

Where savings in bank/building society account are protected by the FSCS up to a level of £85,000 per investor per FS provider

Question 20

What is National savings and Investments?

Answer 20

• offers a range of saving/investment products on behalf of the Government
• deemed at low risk because all products guarantee the return of capital invested
• interest on the income bonds are not tax free

Question 21

What are offshore account?

Answer 21

Applies to any form of investment based outside of the UK

Question 22

Give 2 ways In how offshore investment can expose the investor to greater risk?

Answer 22

1. The account may not be in sterling and will therefore be at risk for adverse currency movements
2. Not all offshore accounts will be protected by investor protection schemes

Question 23

HMRC and offshore account are often perceived as…

Answer 23

As a vehicle to hold monies that are not declared by tax authorities

Question 24

What are Gilts?

Answer 24

British Government securities that represent the borrowing from the government

Question 25

Why are Gilts good?

Answer 25

1. You can know for certain how much income will be produced over a long period of time 2. You can know how much capital you’ll get back

Question 26

What are the 3 sectors where gilts are identified?

Answer 26

- Name (shows government department) - Coupon (interest paid depends on the PAR value of £100) - Redemption date (when government pay back capital)

Question 27

What is the calculation for working out income on guilts?

Answer 27

Income = par value x coupon percentage

Question 28

What is the ‘Redemption Date’?

Answer 28

The length of time before the Government buys back the guilt

Question 29

Describe the redemption for short-dated guilts

Answer 29

Less than 5 years to run to redemption

Question 30

Describe the redemption for medium-dated guilts

Answer 30

5-15 years to run to redemption

Question 31

Describe the redemption for long-dated guilts

Answer 31

More than 15 years to redemption

Question 32

How do the UK dept management office define the redemption categories?

Answer 32

- short-dated guilts = 0-7 years | - medium-dated guilts = 7-15 years

Question 33

What is an index linked Gilt?

Answer 33

Where the interest payments and capital value move in line with inflation

Question 34

Gilt prices are quoted as either ‘cum-dividend’ or ‘ex dividend’, explain both

Answer 34

Cum Dividend - purchaser will receive the next coupon payable Ex Dividend - if the purchaser buys within the 5 weeks prior to coupon date it’s paid by previous owner

Question 35

Describe the tax treatment of gilts?

Answer 35

- exempt from capital gains | - interest is paid gross but subject to tax

Question 36

What are the returns on investment into gilts?

Answer 36

- a fixed date of interest will be paid during the term and the investments can be sold at any time to release capital

Question 37

What are local authority bonds?

Answer 37

Can borrow money by issuing stocks and bonds that are secured in local authority assets and they offer a guaranteed rate of interest

Question 38

What are PIBS (permanent interest bearing shares)?

Answer 38

Issues by building societies to raise capital

Question 39

Give a few key point on PIBS

Answer 39

- pay a fixed rate of interest gross half yearly - bough/sold one tock exchange - are irredeemable

Question 40

What are corporate bonds?

Answer 40

Corporate bonds are loans to commercial organisations

Question 41

Why are corporate bonds considered higher risk investments?

Answer 41

Due to the lack of government backing and they offer higher yields than gilts

Question 42

What are some key points of corporate bonds?

Answer 42

- fixed redemption date - fixed redemption value - fixed interest rate - borrowing is normally long term

Question 43

What is a Eurobond?

Answer 43

It’s a bond issued or traded in a country using a different currency to the one where the bond is denominated (issued by multinational organisations and the government)

Question 44

Give the 2 main points in relation to taxation of income

Answer 44

1. Local authors and corporate bonds pay interest to individual UK residents 2. PIBS and Eurobonds pay interest gross without deduction of tax

Question 45

What is a structured deposit?

Answer 45

A complex and purchased deposit by a financial advisor

Question 46

Give an advantage and disadvantage of a structured deposit

Answer 46

:) - there is access go equity based returns where depositors will always get back initial investment :( - there is a lowered potential for reward

Question 47

What is alternative finance (peer 2 peer)?

Answer 47

Involves a saver placing their money with a P2P lender who will lend money out to the businesses seeking funding (arranged via aggregating companies)