unit 1 topic 6- Direct investments, cash and fixed interest securities Flashcards

1
Q

Define Capital

A

In the case of a savings account, capital is the cash that is deposited. It differs from ‘money’ in the sense that it is being used to generate wealth rather to purchase goods and services.

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2
Q

What are the five main asset classes?

A
  • Cash- Property- Equities- Fixed interest securities- Alternative investments (fine wine, antiques etc)
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3
Q

What are gilts?

A
  • Gilts belong to a category of direct investment called ‘fixed interest securities’.- They are a form of borrowing by the UK government.- Gilts are regarded safe because the government is not expected to default on capital repayments or interest.
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4
Q

Define ‘Redemption Date’ and ‘Coupon’ with respect to gilts.

A

Redemption Date: 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. This works in the same way as redeeming an interest-only mortgage.Coupon: The interest rate payable on the par value of a gilt. It is a fixed rate, paid half-yearly, gross but taxable.

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5
Q

Direct Saver Outline the Term, tax, limits and additional info of the product above.

A

Term: None Tax: TaxableLimits: £1 - £2mMin. age 16. Managed online or over the phone. Interest variable.

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6
Q

Investment account Outline the Term, tax, limits and additional info of the product above.

A

Term: None Tax: Taxable, paid grossLimits: £20 - £1mMin. age 16. Interest variable. Investment into an NS&I investment account can be made on behalf of someone under 16.

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7
Q

Income bonds Outline the Term, tax, limits and additional info of the product above.

A

Term: None
Tax: Taxable, paid gross
Limits: £500 - £1m
Min. age 16. Interest variable (paid monthly).

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8
Q

Direct ISA Outline the Term, tax, limits and additional info of the product above.

A

Term: None Tax: Tax-freeLimits: £1 - £20,000 (2023/24)Min. age 16. UK residents only. Interest variable. Managed online or over the phone.

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9
Q

Premium bonds Outline the Term, tax, limits and additional info of the product above.

A

Term: None
Tax: Tax-free
Limits: £25 - £50,000
Min. age 16 (can be bought on behalf of under-16s).
No interest paid, monthly prize draw.
Max. winnings £1m.

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10
Q

Junior ISA Outline the Term, tax, limits and additional info of the product above.

A

Term: None
Tax: Tax-free
Limits: £1 - £9,000 (2024/25)
Min. age 16.
No access before age 18.

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11
Q

Guaranteed Income Bonds Outline the Term, tax, limits and additional info of the product above.

A

Term: 1 year and 3 years
Tax: Taxable
Limits: £500 - £10,000
Fixed monthly interest
available to those aged 16 and over.

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12
Q

Guaranteed Growth Bonds Outline the Term, tax, limits and additional info of the product above.

A

Term: 1 year and 3 years
Tax: Taxable
Limits: £500 - £10,000
Fixed rate of annual growth.
Min. age 16.

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13
Q

What is a debenture?

A

A bond that is backed by security. The security is provided by a charge over company assets.

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14
Q

What are Local authority bonds?

A
  • Local authorities borrowing money by issuing stocks or bonds.- Fixed-term, fixed-interest securities.- Secured on local authority assets and offer a guaranteed rate of interest, paid half-yearly.- Bonds are not negotiable and have a fixed return at maturity.- Return of capital on maturity promised, but no quite as secure as gilts since there is no government guarantee.
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15
Q

What are Permanent interest-bearing shares?

A
  • PIBS are issued by building societies to raise capital.
  • Pay a fixed rate of interest on a half-yearly basis.
  • Interest is paid gross, taxable as savings income according to the investor’s tax status.- PIBS rank below ordinary accounts in priority of payment. Higher risk as depositors paid before shareholders.
  • If a building society convertx to a bank by ‘demutualising’, the PIBS it has issued are converted to perpetual subordinated bonds (PSBs).
  • PSBs are similar to PIBS: no redemption or maturity date and provide a fixed income.
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16
Q

What are corporate bonds?

A
  • Corporate bonds are fixed interest securities issued by companies to raise finance similar to gilts issued by the government.- The bond is issued with the promised to pay a fixed rate of interest until redemption date, with the loan repaid in full at redemption date.- Bond may be secured against company assets or unsecured. (Unsecured has higher risk).- Risks linked to the company’s prospects, financial strength. Riskier than gilts because it is not backed by government.- Corporate bonds pay higher rate of interest than similar gilts.
17
Q

What are Eurobonds?

A
  • A Eurobond is a bond issued or traded in a currency other than the one in which the bond is denominated. (Outside jurisdiction of central bank that issues currency).- Eurobonds are a form of borrowing used by multinational organisations and governments.- Nothing to do with the euro currency.
18
Q

Bond Class Taxation.

A
  • Net interest paid to individual UK residents: local authority bonds, corporate bonds.
  • Gross interest (without deduction of tax): PIBS and Eurobonds.-
  • Income classed as savings so would be tax free if it fell within an individual’s starting-rate band for savings income or personal savings allowance.-
  • If exceeded personal allowanced, it will be taxed at 20%, 40%, or 45% determined by individual’s gross income. Where income taken at source, this can be deducted from the amount owned.