Topic 6 (Direct Investments) Flashcards
What are the main financial asset classes?
- cash
- fixed interest securities
- equities
- property
- ‘alternative investments’
What is the main principle of investment?
The greater the risk presented the greater the potential return
Describe the levels of return for CASH
Offers variable but low levels of return through interest with limited risk to capital
Describe the levels of return for SHARES
Offer no guarantee with regard to income payments or future capital values
What is a deposit based investment?
-where the capital is fixed but the income may vary
Name some types of deposit based investments
- bank and building society accounts
- national savings and investment products
- cash ISAs
- offshore deposits
Why do investors use deposit based savings?
-capital investment remains intact
-good for short term savings
-readily accessible
-emergency funds (no notice deposit account)
‘Rainy day money’
What are the 2 types of interest bearing accounts?
- Current accounts (everyday money)
2. Savings accounts (money that’s set aside)
What is a traditional current account?
An account where an individual can have their salary/wages paid
What accounts can arrange an overdraft?
A transactional current account can have an overdraft but a basic bank account cannot
What is a basic bank account?
A simplified current account which is typically aimed at those on low incomes
What is an interest bearing current account?
Provides investors with immediate access to their funds without any loss of interest
Explain the rates of interest for a bearing current accoung
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
What is a packaged current account?
Offers a range of ancillary benefits such as breakdown cover, mobile insurance, travel insurance in return of a monthly fee
Give some features of an Instant access savings account…
- opened with as little as £1
- immediate access
- few limitations
- low interest rate
- good for short term emergency funds
What are the rates like for Restricted accounts?
The provider has certainty that the funds are available to it for a longer period so therefore rates are higher
Give examples of how access maybe restricted…
- limiter amount of withdrawals
- minimum period of notice
- specifies term agreed at outset
What is a fixed-term bond?
Offers a fixed rate of return if money is saved for a fixed term
What is ‘Deposited protection’?
Where savings in bank/building society account are protected by the FSCS up to a level of £85,000 per investor per FS provider
What is National savings and Investments?
- 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
What are offshore account?
Applies to any form of investment based outside of the UK
Give 2 ways In how offshore investment can expose the investor to greater risk?
- The account may not be in sterling and will therefore be at risk for adverse currency movements
- Not all offshore accounts will be protected by investor protection schemes
HMRC and offshore account are often perceived as…
As a vehicle to hold monies that are not declared by tax authorities
What are Gilts?
British Government securities that represent the borrowing from the government
Why are Gilts good?
- You can know for certain how much income will be produced over a long period of time
- You can know how much capital you’ll get back
What are the 3 sectors where gilts are identified?
- Name (shows government department)
- Coupon (interest paid depends on the PAR value of £100)
- Redemption date (when government pay back capital)
What is the calculation for working out income on guilts?
Income = par value x coupon percentage
What is the ‘Redemption Date’?
The length of time before the Government buys back the guilt
Describe the redemption for short-dated guilts
Less than 5 years to run to redemption
Describe the redemption for medium-dated guilts
5-15 years to run to redemption
Describe the redemption for long-dated guilts
More than 15 years to redemption
How do the UK dept management office define the redemption categories?
- short-dated guilts = 0-7 years
- medium-dated guilts = 7-15 years
What is an index linked Gilt?
Where the interest payments and capital value move in line with inflation
Gilt prices are quoted as either ‘cum-dividend’ or ‘ex dividend’, explain both
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
Describe the tax treatment of gilts?
- exempt from capital gains
- interest is paid gross but subject to tax
What are the returns on investment into gilts?
- a fixed date of interest will be paid during the term and the investments can be sold at any time to release capital
What are local authority bonds?
Can borrow money by issuing stocks and bonds that are secured in local authority assets and they offer a guaranteed rate of interest
What are PIBS (permanent interest bearing shares)?
Issues by building societies to raise capital
Give a few key point on PIBS
- pay a fixed rate of interest gross half yearly
- bough/sold one tock exchange
- are irredeemable
What are corporate bonds?
Corporate bonds are loans to commercial organisations
Why are corporate bonds considered higher risk investments?
Due to the lack of government backing and they offer higher yields than gilts
What are some key points of corporate bonds?
- fixed redemption date
- fixed redemption value
- fixed interest rate
- borrowing is normally long term
What is a Eurobond?
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)
Give the 2 main points in relation to taxation of income
- Local authors and corporate bonds pay interest to individual UK residents
- PIBS and Eurobonds pay interest gross without deduction of tax
What is a structured deposit?
A complex and purchased deposit by a financial advisor
Give an advantage and disadvantage of a structured deposit
:) - there is access go equity based returns where depositors will always get back initial investment
:( - there is a lowered potential for reward
What is alternative finance (peer 2 peer)?
Involves a saver placing their money with a P2P lender who will lend money out to the businesses seeking funding (arranged via aggregating companies)
