Unit 1 - Topic 6 Direct Investments: Cash and fixed-interest securities Flashcards
What are the main financial asset classes?
1) Cash (ie money held in deposit accounts)
2) Fixed Interest securities (eg gilts, corporate bonds)
3) Equities (company shares)
4) Property (eg buy-to-let)
(5) Alternative investments (fine wine, antiques, works of art)
What is capital?
In the case of a savings account, capital is the cash that is deposited. It differs from ‘money’ in the sense that is is being used to generate wealth rather to purchase goods and services.
Why do investors place money in deposit-based savings accounts?
1) Security of capital - investors do not want to put their capital at risk (however inflation can reduce the value of capital, as can the institution becoming insolvent)
2) Convenience - banks and building societies are readily accessible
What is a traditional current account?
A transactional account where an individual can have their salary or wages paid. There are also a range of ways that money can be drawn or used to pay regular bills. Overdrafts are possible.
What is a basic bank account?
A simplified current account. Aimed at people (typically those on low income or receiving state benefits) who might not otherwise be able to open a current account. Methods of withdrawing are limited and there is no overdraft facility.
What is an interest-bearing current account?
Accounts that provide investors with instant access to their funds without loss of interest. They work in the same way as a standard current account.
What is a packaged current account?
Offers the holder a range of ancillary benefits such as breakdown cover, mobile phone insurance and travel insurance in return for a monthly or annual fee.
What is an instant-access savings account?
Where an account holder can have instant access to their savings. The interest paid is comparatively low and interest rates are usually variable.
What are restricted access accounts?
An account where interest rates are usually higher because the provider has certainty that funds are available to them for a longer period. Access may be restricted by:
- limiting the number of withdrawals that can be made each calendar year
- requiring minimum period of notice before funds can be drawn (notice account)
- specifying an agreed period during which the saver may not access their money (a term account)
What is depositor protection?
Savings in bank and building society accounts are protected by the Financial Services Compensation Scheme (FSCS) up to a level of £85,000 per investor per financial services provider.
What is National Savings and Investments?
NS&I offers a range of savings and investment products backed by the government. The risk associated with the products is low because the government guarantees the return of capital invested.
What is a cash ISA?
An individual savings account. They are tax-free and can take many forms
What are offshore accounts?
A bank/building society account or other form of investment, which is based outside the UK in a country that offers a more advantageous taxation of investments.
What risks are involved to investors in regards to offshore investments?
1) if an investment is made and needs to be converted back to sterling, its value might be affected by unfavourable exchange rates
2) Not all offshore accounts are protected by investor protection schemes
Why might offshore investing be useful to an investor?
An investor might need money to be available outside of the UK, for example someone who owns a property abroad or plans to move abroad.
Do you have to pay tax on offshore investment gains?
Yes, 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. If the country has a reciprocal tax treaty with the UK, tax relief may be available for any taxes already paid in the other country.
What are gilts?
A gilt is a fixed-interest security’. Their full name being ‘gilt-edged securities’. They are a form of borrowing by the UK government.
What does redemption rate mean?
The date on which the government must redeem the gilt by paying back its original issue value or par value, normally quoted as a nominal £100.
What is a coupon?
The interest rate payable on the pay value of a gilt. It is a fixed rate, paid half-yearly, gross but taxable.
According to the UK Debt Management Office, what is a ‘short-dated gilt’?
A gilt with a redemption date within 7 years
What are the typical categories of gilts as used in the financial press?
Short-dated gilts/shorts - Less than 5 years to run to redemption
Medium-dated gilts/mediums - 5-15 years to run to redemption
Long-dated gilts/longs - more than 15 years to redemption
Once a gilt has been issued, it cannot be redeemed prior to the redemption rate. It can however be sold to other investors. What factors affect the price at which they are sold?
1) the level of market rates of interest
2) the amount of time left to the redemption date
3) supply and demand
Explain the difference between ‘cum-dividend’ and ‘ex-dividend’
Cum-dividend - the buyer acquires the stock itself and the entitlement to the next interest payment.
Ex-dividend - while the buyer still acquires the stock, the forthcoming interest payment will be payable to the previous owner of the stock (the seller)
Do you pay tax on interest from gilts?
Yes, interest is paid gross but is taxable. Investors can however elect for net payment. The interest is taxed in line with normal savings income, outside of starting rate banks and savings allowance at a rate dependent on the income band that their gross income falls/
