Topic 6 - Direct Investments: cash and fixed-interest securities Flashcards
What are the 5 main financial asset classes?
- cash
- fixed interest securities (gilts, corporate bonds)
- equities (shares)
- property
- alternative investments (fine wine, antiques)
Why are investors advised to diversify their holdings between different asset classes?
To balance the risk as different asset classes may perform better at different stages of the economic cycle
Why do people choose deposit-based investments?
- security of capital
- convenience
Name 5 different types of bank/ building society accounts.
- Traditional current account
- Basic bank account
- Interest-bearing current account
- Instant access savings accounts
- Restricted access accounts
What restrictions may be placed on a restricted access account?
- limiting the number of withdrawals each calendar year
- requiring a minimum notice period for withdrawals
- creating a term account (a specified period where the saver cannot access their money)
What are National Savings & Investment products?
NS & I
Savings and investment products backed by the government. Risk is low.
Name 5 types of NS & I products.
- Direct Saver
- Income Bonds
- Direct ISA
- Premium Bonds
- Junior ISA
Which 3 NS & I products are tax free?
- Direct ISA
- Premium Bonds
- Junior ISA
What is the minimum age for an NS & I product?
16 years
What is an offshore account?
An investment medium held outside the UK
Offers more advantageous taxation of investments
Why do offshore accounts pose greater risk?
- might not be denominated in sterling -value might be affected by exchange rates
- may not be protected by investor protection schemes
Is the interest on offshore accounts taxable?
It must be declared to the HMRC and may be taxable
What are gilts?
Gilt-edged securities are a fixed-interest security
Form of borrowing by the UK government
Safe investments as government is not expected to default on capital payments or interest
What is the redemption date and what does ‘coupon’ mean?
The redemption date is when the government must redeem the gilt and pay back its value or par value.
The coupon is the interest rate of a gilt. Fixed rate, paid half -yearly, gross but taxable
Explain the meaning of this example of a gilt;
‘Treasury 5% 2021’
Treasury 5% 2021
A gilt with a coupon (interest rate) of 5% and a redemption date in 2021
What are the 3 categories of gilts?
Short-dated gilts- less than 5 years
Medium -dated gilts - 5-15 years
Long dated gilts - More than 15 years
The UK Debt Management Office defines short dated gilts as what?
Less than 7 years
What are index-linked gilts?
The interest payments and capital move in line with inflation
Can gilts be redeemed early?
No. They can be sold to other investors
What is the difference between cum-dividend and ex-dividend?
cum-dividend - the stock is bought with the entitlement to the next interest payment
ex-dividend - the next interest payment will be payable to the previous owner (the seller)
Is capital gains tax (CGT) payable on the redemption of gilts?
No. They are entirely free of capital gains tax
How do you calculate the running yield of a gilt?
running yield = coupon / price paid
e.g. £5 / £130.73 = 3.82%
Name 4 other kinds of fixed-interest stocks.
- Local authority bonds
- Permanent interest -bearing shares
- Corporate bonds
- Eurobonds
What is a corporate bond?
Similar to gilts
A way for companies to raise capital
Bond is issued with a promise to pay a fixed-rate of interest
Stated redemption date
Secured (backed by company assets) or unsecured
