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

Question 1

Define Capital

Answer 1

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 than to purchase goods and services.

Question 2

What are the five main asset classes?

Answer 2

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

Question 3

What are gilts?

Answer 3

• 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.

Question 4

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

Answer 4

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.

Question 5

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

Answer 5

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

Question 6

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

Answer 6

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.

Question 7

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

Answer 7

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

Question 8

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

Answer 8

Term: None Tax: Tax-freeLimits: £1 - £20,000 (2019/20)Min. age 16. UK residents only. Interest variable. Managed online or over the phone.

Question 9

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

Answer 9

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.

Question 10

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

Answer 10

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

Question 11

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

Answer 11

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

Question 12

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

Answer 12

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

Question 13

What is a debenture?

Answer 13

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

Question 14

What are Local authority bonds?

Answer 14

• 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.

Question 15

What are Permanent interest-bearing shares?

Answer 15

• 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.

Question 16

What are corporate bonds?

Answer 16

• 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.

Question 17

What are Eurobonds?

Answer 17

• 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.

Question 18

Bond Class Taxation.

Answer 18

• 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.