U1: T6 - DIRECT INVESTMENTS: CASH AND FIXED-INTEREST SECURITIES Flashcards
What 3 main components are conventional Gilts made up of?
1) Par (face value)
2) Coupon
3) Redemption Date
In the context of GILTs what is the Par (face) value?
The issue value - the initial loan made to the government
In the context of GILTs what is the Coupon?
A taxable fixed interest rate payable on the par value at half-yearly intervals
In the context of GILTs what is the Redemption Date?
The date on which the government must ‘redeem’ or pay back the amount borrowed i.e. the par value
GILT coupons are:
1) Taxable
2) Not-taxable
1) Taxable
According the Financial Press a 6y GILT is:
1) Short-dated
2) Medium-dated
3) Long-dated?
- Medium-dated
According to the UK Debt Management Office, is a 6-year GILT:
1) Short-dated
2) Medium-dated
3) Long-dated?
1) Short-dated
According to the UK Debt Management Office, what is a short-dated GILT?
1) Less than 5 years to redemption
2) Less than 6 years to redemption
3) Less than 7 years to redemption
3) Less than 7 years to redemption
According to the UK Debt Management Office, what is a medium-dated GILT?
1) Between 5-15 years to redemption
2) Between 6-15 years to redemption
3) Between 7-15 years to redemption
3) Between 7-15 years to redemption
According to the UK financial press, what is a short-dated GILT?
1) Less than 5 years to redemption
2) Less than 6 years to redemption
3) Less than 7 years to redemption
1) Less than 5 years to redemption
According to the UK Financial Press, what is a medium-dated GILT?
1) Between 5-15 years to redemption
2) Between 6-15 years to redemption
3) Between 7-15 years to redemption
1) Between 5-15 years to redemption
According to the UK Financial Press, what is a long-dated GILT?
1) More than 14 years to redemption
2) More than 15 years to redemption
3) More than 16 years to redemption
2) More than 15 years to redemption
Why does the fact that corporate bonds are regarded as riskier than gilts mean that they generally pay higher rates of interest than similar gilts?
Corporate bonds pay higher rates of interest than similar gilts because of the relationship between risk and reward – the more risky the investment is considered to be, the greater the reward the investor expects
A bank deposit account is a good place to hold a ‘rainy day fund’. True or false?
True.
Deposit accounts allow instant access to funds and they are low risk because savings are protected by the Financial Services Compensation Scheme up to a limit of £85,000.
What, if any, is the minimum age at which a person can take out an NS&I Direct Saver?
a) There is no minimum age.
b) 16.
c) 18.
b) 16.
Interest on NS&I Income Bonds is tax‐free. True or false?
False.
Interest is paid gross but is taxable.
State two reasons why offshore bank accounts might be more risky than similar UK deposit accounts.
If the investment is held in a currency other than sterling, its value might be affected by adverse exchange rates if it has to be converted to sterling. Accounts held offshore might not be covered by investor protection schemes to the same extent as onshore UK investments.
In relation to gilts, what is the ‘coupon’?
The coupon is the interest rate payable on the par value of a gilt.
Jane has invested in short‐dated gilts. According to the UK Debt Management Office (DMO) definition, this means that:
a) the gilts will have a redemption date within the next seven years.
b) interest on the gilts will not be paid to her until the end of the term.
c) the gilts will have a redemption date within the next ten years.
d) she will be unable to access her capital until the end of the term.
a) The gilts will have a redemption date within the next seven years.
Rubina is considering buying a gilt, 3% Treasury 2025. The gilt is currently trading at a price of £107. What is the running yield?
The running yield is £3 (coupon) ÷ £107 (price paid) = 2.8%.
Running yield = coupon ÷ price paid
The main difference between corporate bonds and gilts is that corporate bonds:
a) usually pay a variable rate of interest.
b) are usually for larger amounts of money.
c) normally have no specified redemption date.
d) are considered to be higher‐risk investments.
d) Corporate bonds are considered to be higher‐risk investments.
The main difference between a debenture and other types of corporate bond is that a debenture:
a) carries the right to vote at the company’s annual general meeting.
b) is usually secured on the assets of the company.
c) can be converted to ordinary shares of the company.
d) pays a fixed rate of interest.
b) A debenture is usually secured on the assets of the company.
A Eurobond is the equivalent of a gilt, but issued by a government within the eurozone. True or false?
False.
A Eurobond is a bond issued or traded in a country that uses a currency other than the one in which the bond is denominated, and they can be issued by large companies, not just governments.
Jack opens an account so that his wages can be paid into it. He can use his account to pay bills such as utilities and rent via direct debit, and he can use his debit card to make purchases online and in shops, but he cannot have an overdraft. What kind of account does Jack have?
a) Packaged account.
b) An interbank account.
c) A basic bank account.
d) A debit account.
c) A basic bank account.
Income from a Eurobond received by a higher-rate taxpayer qualifies for:
a) capital gains tax exemption.
b) the annual dividend allowance.
c) personal savings allowance.
d) tax-free status.
c) personal savings allowance.
An investor has bought a gilt ‘cum dividend’. This means they:
a) and the seller will each receive 50% of the next due income payment.
b) will be entitled to a bonus dividend on the next due income date.
c) will receive 100% of the next due income payment.
d) will not receive any of the next due income payment.
c) will receive 100% of the next due income payment.
Which of the following is true? Peer-to-peer lending is:
a) regulated by the Prudential Regulation Authority.
b) a direct contract between one lender and one borrower.
c) co-ordinated by banks and building societies.
d) not protected by the Financial Services Compensation Scheme.
d) not protected by the Financial Services Compensation Scheme.
Sally has a National Savings and Investment (NS&I) product, but her friend Sarah cannot open a similar account because new issues of the product are no longer available. This means Sally has an NS&I:
a) premium bond.
b) income bond.
c) guaranteed growth bond.
d) investment account.
c) guaranteed growth bond.
Guaranteed growth and income bonds have new issues which are not up for sale
Jerry has a corporate bond secured on the company’s assets. This is referred to as:
a) loan stock.
b) an investment bond.
c) a perpetual subordinated bond.
d) a debenture.
d) a debenture.
Joanne has a basic bank account. Which feature is her account unlikely to offer?
a) ATM card.
b) Overdraft facility
c) Direct debits.
d) Cash withdrawals from a Post Office.
b) Overdraft facility
Income from an offshore deposit account is tax free for a UK resident.
a) True b) False
b) False
The interest on an offshore deposit is paid gross. A UK resident must declare the income to HMRC and may have to pay tax on it. However, if the country where the investment is held has a reciprocal tax treaty (double taxation arrangement) with the UK, and the interest has already been taxed overseas, tax relief may be available on some or all of it.
A structured deposit account:
a) provides a guaranteed fixed return.
b) places the original capital at risk.
c) runs for a fixed term.
d) matches the return from an associated stock market index.
c) runs for a fixed term.
The total return is not guaranteed, although the original capital is guaranteed to be returned at the end of the fixed term. The total return is linked to the performance of an associated stock market index, although the return will usually be below the index’s actual return.
Kimberley’s paid £105 for a 4% Treasury gilt with a par value of £100. What is the running yield of the gilt?
a) 2.5%.
b) 3.8%.
c) 4%.
d) 5%.
b) 3.8%.
The running yield is the income of £4 (par value of £100 x 4%) as a percentage of the £105 price paid = 3.8%.
Amanda has a permanent income-bearing shareholding. This means:
a) the issuing organisation is now a bank.
b) the investment is lower risk than a deposit account.
c) she has a corporate bond holding.
d) she has no guarantee that her original investment will be repaid.
d) she has no guarantee that her original investment will be repaid.
The interest on an offshore deposit is paid:
A) gross
B) net
A) gross
An investor has bought a gilt ‘ex dividend’. This means they:
a) and the seller will each receive 50% of the next due income payment.
b) will be entitled to a bonus dividend on the next due income date.
c) will receive 100% of the next due income payment.
d) will not receive any of the next due income payment.
d) will not receive any of the next due income payment.
Sale of a GILT is liable for CGT?
True or False
False
Any capital gains made on the sale or redemption of gilts are entirely free of capital gains tax (CGT).
Sale of a GILT is liable for CGT?
True or False
False
Any capital gains made on the sale or redemption of gilts are entirely free of capital gains tax (CGT).
Permanent interest‐bearing shares are issued by:
A) Government
B) Local Authorities
C) Building Societies
C) Building Societies
Permanent interest‐bearing shares pay:
A) Quarterly
B) Semi-Annually
C) Annually
B) Semi-Annually
If a building society ‘demutualises’ what does it become?
Converts to a bank
Complete this sentence:
‘If a building society converts to a bank by ‘demutualising’, the PIBS it has issued are converted to _______’
Perpetual subordinated bonds (PSBs).
How is the income of Local authority bonds, corporate bonds, PIBS and Eurobonds classed?
Savings income
Which 3x NS&I government investment range is tax free?
Direct ISA
Junior ISA
Premium Bonds
What is the minimum age for all NS&I products?
16
NS&I Green Savings Bonds are not taxable.
True or false
False - they are taxable at maturity
Any capital gains on gilts are subject to CGT. True or false
False
Any capital gains made on the sale or redemption of gilts are
entirely free of capital gains tax (CGT).
GILT interest that falls beneath an individuals savings band will not be taxable.
True or false
True
Gilt interest is normally paid gross without deduction of tax, although investors
can elect for net payment. The income is classed as savings income so would
be tax free if it fell within an individual’s starting-rate band for savings income
or their personal savings allowance
A structured deposit performance is equal to the underlying index.
True or false
False.
The return generated through a structured deposit is variable because it is linked to the performance of the underlying index.
Because structured deposits guarantee the return of their deposit - the return of index gains is reduced (will lag index performance)
A Perpetual Subordinated Bond (PSB) used to be a?
PIBS - Permanent Interest-bearing share before the building society was demutualised.
