Topic 6 Direct Investments: Cash & Fixed-Interest Securities Flashcards
What are the main assets classes?
- Cash
- Property
- Fixed Interest Securities
- Equities
Fine wine, works of art, antiques
Can be classed as an?
Alternative Investment
The most common type of direct investment is?
A deposit account
Why would an invester use a deposit account?
- Security of capital
- Convenience
Which of these accounts have these functions?
- Salary can be received
- Bills are paid
- Debit card, electronic transfer, cheque book
Traditional Current Account
Which of these accounts have these functions?
- Simplified current accounts aimed a people who haven’t had them before
- Money received in many ways
- Cash withdrawals are limited
- No cheque books or overdrafts
Basic Bank Account
Which of these accounts have these functions?
- Provide Investors with access to their account without loss of interest
Interest Bearing Current Account
What are High-Interest Current Accounts?
- Current accounts that earn high interest
- To qualify you need to pay a minimum amount or set up a number of direct debits
Breakdown cover, mobile phone insurance & travel insurance
Are features of what?
Package Current Accounts
Package Current Accounts normally have what?
A monthly or an annual fee
Which of these accounts have these functions?
- Instant access to savings
- Low interest rate linked to bank
- ideal for “emergency funds”
- Interest tiered for large deposits
Instant Access Savings Accounts
Why do instant access current account pay more interest?
Admin is performed by the account holder or centralised function meaning lower costs involved
Which of these accounts have these functions?
- Offers a higher rate of return for the period time funds saved
- Access to the account is restricted
- Notice periods required to withdraw funds
- withdrawals are limited
Restricted Access Accounts
How much does the FSCS cover per investor and financial institution?
Up to £85,000
Why do NS&I products offer a lower rate of return?
The return of invested funds is guaranteed by the government
What is the minimum age a person can buy an NS&I product?
Age 16
What do the below NS&I products all have in common?
- Direct ISA
- Junior ISA
- Premier Bonds
They are all tax free
At 3 years which NS&I product has the longest maturity?
Green Saver Bonds
What is the maximum a person can deposit in a NS&I Direct Saver account?
£2 Million
What is a Cash ISA?
Tax free interest earned on a bank or building society deposit accounts
What is an offshore account?
A bank/building society account held outside the UK which offers an advantage tax on investments
What are the risks of an offshore account?
- Account may not be in GPB so conversation may cost investments
- May not be covered by investor protection schemes
Since 2016 how have HMRC and Crown Dependencies helped each other?
They have exchanged details of people with offshore accounts
What must a UK resident do if they receive offshore account interest?
Declare it to HMRC
What is a Gilt?
Fixed-Interest security that is a form of borrowing by the UK government
How is a Gilt categorised?
By the amount of time left until it’s redemption
What is the redemption date for a Gilt?
The date which the original issue value is to be repaid
What is the coupon on a Gilt?
Is the interest payable on the par value of the Gilt?
How do the financial press classify Gilts?
In 3 types
- Short-dated Gilts
- Medium-dated Gilts
- Long-dated Gilts
What type of Gilt is this?
- less than 5 years to redemption
Short-dated Gilt
What type of Gilt is this?
- 5 - 15 years to redemption
Medium-dated Gilt
What type of Gilt is this?
- More than 15 years to redemption
Long-dated Gilts
Who issues Gilts?
The UK Debt Management Office
What is different with how the UK Debt Management Office dates Gilts?
Short-dated Gilts
Less than 7 years remaining
Medium-dated Gilts
7-15 years remaining
What are Index-linked Gilts?
Gilts who’s coupon and capital value move with inflation
What is an advantage of Index-linked Gilts over fixed Gilts?
The capital value of an Index-linked gilt is not affected by inflation
Can a gilt be redeemed early?
No but they can be sold to other investors
- The level of market interest
- Time left until redemption
- Supply and Demand
Are what?
Factors that may influence the the sale of Gilts
What does “Cum Dividend” mean?
Means the new buyer of a Gilt is entitled to the next interest payment
What does “Ex Dividend” mean?
The next interest payment is due to the seller of the gilt
Does capital gains tax need to be paid on the redemption or sale of a Gilt?
No CGT is not due
How much is the par value of a Gilt?
£100
What is a running yield
The value of the coupon rate divided by what it is currently trading at?
Example of running yield
Coupon rate value of 5.50
/
Current market value £120
Running yield of 4.58%
What is a Local Authority Bond?
A way local authorities can borrow money by issuing stocks or shares
How are local authority bonds secured?
They are secured on local authority assets
When is interest paid on local authority bonds?
They are paid half yearly
What was a Permanent Interest-bearing Shares (PIBS)?
A share issued by a Building Society
When was interest paid on a PIBS?
Half yearly
Who would have priority if building society failed?
A depositor or a shareholder?
A depositor because a PIB has less priority
What happens to a PIB if a bank demutalises be become a bank?
It is converted to a Perpetual Subordinated Bond (PSB)
What are the 2 ways companies raise funds?
- Borrowing
- Issuing Shares
How are Corporate Bonds and Gilts similar?
Pay a fixed rate rate of interest until redemption.
If a company issues Corporate bonds it generally helps its long term financing needs?
True or False
True
What is a “Debenture”?
A corporate loan secured against a company’s assets
What is “Loan Stock”?
A corporate bond that is not secured
Can corporate bond holder change their bond to ordinary shares in the company?
Yes but they don’t have to if they don’t want to
If a company doesn’t make sufficient profits do they need to make the interest payment to the corporate bond holder?
They are obliged
If a company is wound up who has priority over assets the corporate bond holders or shareholders?
Corporate Bond holders
What is a Eurobond?
A bond issued in a country that uses a currency difference to it’s country of issue. E.g a GBP issued in Japan
Why would a company issue a Eurobond?
The bond is outside the jurisdiction of the country that issue it’s registered currency
What do these all have in common?
- Local Authority Bonds
- Corporate Bonds
- PIBS
- Eurobonds
All pay interest gross
Bond income is classed as what for tax purposes?
Savings income
What is a Structured Deposit?
A deposit that is linked to an index that measures the performance of shares
Are Structured Deposits fixed or variable investments
Fixed
Are returns from a fixed deposit set each year?
No the returns are variable
What is an advantage of a Structured Deposit?
The depositor is guaranteed to get their initial investment back
What is an disadvantage of a Structured Deposit?
Less risk investors may not receive a dividend payment
What is Alternative Finance?
A form of lending that does not involve a bank
What is Crowd Funding?
A way that individuals, charities & business raise money from the public
- Donation based
- Reward based
Are examples of what?
How a crowdfunded activity receives money
Is crowdfunding
regulated?
No it is not regulated by the FCA
What is (Peer to Peer Lending (P2P) / Loan Based Crowdfunding?
A P2P lender who lends out to businesses who require crowdfunding
How is Peer to Peer Lending different?
It is not deposit based
How can investment returns for Peer to Peer be paid?
- Easy Access
- Fixed Term
Why is Peer to Peer Lending riskier?
As Loan repayments can be missed
Are P2P lending or investments regulated?
Yes regulated by the FCA but not covered by the FSCS
Who is P2P Investments aimed at?
Experienced Investors
If a normal investor does get involved in Peer to Peer Lending what is the limit of investments they are encouraged to stay to?
10% of the net assets
What is investment-based Crowdfunding?
Where investors funds are exchanged for a share of a company
All NS&I bonds with the exception of Green Saver Bonds pay tax gross.
True or False
True
What rate of return do Local Authority Bonds offer?
offer a non-negotiable fixed rate of interest
Is gilt interest paid net or gross of tax?
It is paid gross as savings income
Why has the government issued Green Gilts?
As part of its Green Financing Framework
