Weaker areas Cramming Flashcards
Different type of credit risk
- Default risk
- Downgrade risk
- Credit spread risk
- Counterparty risk
- Bail-in-risk
Benefits of a weak pound
- Encourages firms to open up in this country rather than in the Eurozone
- Makes it cheaper for us to sell things around the world
- Favours exporters
Explain the macro-economic role of financial investment within the economy
- stimulate spending
- by increasing demand
- increases productivity
- and business investment
What are NS&I children’s bonds
- Minimum £25
- Maximum £3,000 per issue
- Rolling 5 year contract
- Terminates on first 5th anniversary after child’s 16th birthday
- Historical product which can no longer be renewed on expiry
- Tax free product
- Relatives could contribute
- Fixed interest rates
What are fixed interest savings certificates
- 2 & 5 year terms available
- Minimum £100
- Maximum £15,000
- Only available to existing investors re-investing
- Guaranteed fixed interest
what are index linked savings certificates NS&I
- Minimum £100
- Maximum £15,000
- Return based on fixed interest and CPI changes
- 2, 3 and 5 year terms
- only available to existing investors re-investing
What are direct savers NS&I
- aged 16+
- individual or joint
- Minimum £1.00
- Maximum £2,000,000 single, £4,000,000 joint
- Interest paid gross but taxable
- Instant access
- No set term
- Managed by phone or online
What is an NS&I income bond
- Minimum £500
- Maximum £1,000,000 per person
- variable interest
- instant access
- pays monthly income
- Income paid 5th every month
- Paid gross but taxable
what is NS&I investment account
- Minimum £20
- Maximum £1,000,000
- No notice
- No penalties
- Interest paid gross but taxable
- Postal only account not marketed online
- very low interest rate
What are Guaranteed Growth
Bonds (British Saving Bonds)
- Minimum £500
- Max £1,000,000
- Fixed 1 or 3 years
- No access until end of term
- Interest paid gross at end of term but taxable
What are Green savings bonds?
- Min £100
- Max £1,000,000
- Fixed for 3 years
- No access until end of bond term
- Interest paid gross but taxable
What are treasury bills
- most common
- managed by DMO
- weekly auctions
- bought below face value and repaid at par to provide growth
- risk free investments
- short term
what are certificates of deposits
- issued by banks
- fixed term and fixed return
- usually 1-3 months
- interest paid on maturity
- can’t withdraw early but can sell on stock market
what are commercial bills
- very short term
- typically 30-90 days
- operate similar to treasury bills
- bought below face value and sold at face value
Annualised return formula
(1+ return)1/n - 1
RPI figures for gilts
• GILTS issued prior to September 2005 use RPI figures from the period eight months prior to each coupon payment date,
• those issued after this date use RPI figures from the period three months prior to each coupon payment date.
This is known as ‘indexation lag’.
What are offer for sale?
- Shares marketed to general public
- share price set lower than optimum to encourage demand
- price can be fixed upfront
- or determined via a tender process but with no commitment to go ahead if demand isn’t high enough
what are placings?
- cheap and fast way to get to the market
- pitch directly to big institutions
- as general public not involved, no expensive marketing or prospectuses needed
What is a rights issue?
- offer for sale
- existing shareholders at front of queue
- they get the option to buy shares first
- issue price lower than share price
- therefore exercising the rights issue dilutes share price and causes ex theoretical price
- the right has a value, if shareholder doesn’t exercise it they can sell the right to someone else
what are bonus issues?
- company issues new shares
- paying for them out of reserves
- sometimes known as scrip issue
- dilutes existing market price of a share
- makes it more attractive to new investors
what is a share split?
- where shares in issue are split
- into a greater number of shares
- effect is same as bonus issue
what is an open offer?
- similar to a rights issue
- marketed to existing shareholders
- offered be shares pro-rata at a discount
- unlike rights issue cannot be traded
PEG ratio
P/E ratio / estimate of companies average earnings growth for next 5 years
Commodity benefits
- can provide diversification to a portfolio
- may not be correlated with existing investments
- does not provide income, all returns through capital growth which may be better for higher rate tax payers
- returns have often exceeded inflation
- high risk so suitable for high risk investors
what are cryptocurrencies
- each investor has unique blockchain
- anonymous so can be used in money laundering
- currency purchased online
- once confirmed own part of the currency
- currency is electronic not influenced by any bank or government
- very volatile
Diversification rules UCITS exceptions
- Replicating tracker funds - can hold maximum 20% in any one company
- lower limit of 6 securities applies to funds holding government bonds
What is a special purpose vehicle
- a pool of money from investors invested into single company
- investment separate legal entity from host
- securities listed in assets other than listed/unlisted shares or bonds
- SPVs created for a specific purpose
- Isolates risk away from underlying host company
Unit trust tax within fund
- do not pay tax on gains within the fund
- subject to corporation tax regime in respect of untracked income
- do not pay income tax on gains from derivatives
What are section .270 designated territories funds?
- a designated territory
- which the FCA view as providing
- UK investors with protection
- equivalent to
- UK authorised funds
what are section 272 non designated funds?
- not recognised by the FCA
- marketing prohibited in the UK
Reporting funds
- income reported to HMRC
- dividends and interest taxed in UK
- Normal CGT rules apply
- income must be declared whether distributed or not
non-reporting funds
- roll up funds, no income distributed and no dividends paid out
- gains calculated on CGT principles but charged at income tax rates
- can’t use PSA or CGT exemption
Advantages of investment trusts
- fund managers can take a longer view with assets, not forced to sell to pay back investors
- allow for gearing
Criteria to be an investment trust
- investment managers must have adequate experience
- must be adequate spread of risk
- company cannot control any of assets within portfolio
- trust must have a board that act independently of the management
- must seek income tax and corporation tax approval from HMRC
- firm must be listed on stock exchange
- must be a close company
what is a limited life trust
- investment trust
- sets out a specific period
- on maturity,
Long/Short fund style
- combines equities in a neutral approach
- hold long positions in some holdings and short positions in others
What is relative value
- uses arbitrage to try to identify market price anomalies
what are event driven fund strategies
- use corporate events to make their growth such as exploiting profit warnings
what are tactical trading funds
- trade in currencies
- bonds
- equities and commodities
what are accounts made up of
- Statement of financial position
- Income statement
- Cash flow statement
what is the statement of financial position
- shows the assets and liabilities of a company at a single point in time
- shows assets, liabilities, shareholder funds
what is the income statement
- shows the performance of the company over the accounting period
- details how company’s reported profit was arrived at, how much profit has been earned and how this has been distributed
what is cash flow statement
- seeks to identify how a companies cash has been generated over the accounting period
- looks at the cash actually paid and received as opposed to the accruals basis
Formulas covering profitability
- Operating margin
- Net margin
- ROE
- ROCE
what is operating margin?
- provides information about the profitability of the firms core business
- it is profit made after paying operating costs
Formula for operating margin
operating profit / sales x 100
what is net profit margin?
- operating profit after tax and interest
what is return on equity
- ratio of net income of a business during a year to its shareholders equity
- measure of profitability of the shareholders investment
ROE Formula
net profit after tax / sales x 100
what is ROCE
ROCE determines how much the company has earned from the total of the different types of capital it has
employed, so this would include the equity but also long- or short-term borrowings. So would include funds
raised by the issuing of corporate bonds.
ROCE Formula
profit before interest and tax / capital employed x 100
Gearing formula
(long term loans + preference shares) / (total equity - preference shares)
