1 Cash investments & fixed-interest securities Flashcards
(125 cards)
1
Q
What are the major cash deposit takers?
A
- Banks
- Building societies
- Credit unions
- Govt. via NS&I
2
Q
What are the risks of cash investment?
A
- Default
- Inflation
- Interest rate
3
Q
How much cash does the FSCS cover?
A
£85k per person per authorised UK institution
4
Q
What is reinvestment risk?
A
At the end of a fixed term, it may be impossible to reinvest with a decent interest rate
5
Q
Do notice accounts typically have fixed or variable interest rates?
A
Variable
6
Q
What is a typical notice period for a notice account?
A
30-120 days
7
Q
Do small banks/building societies offer higher or lower interest rates on term accounts?
A
Higher, but with more restricted choice of terms
8
Q
Term deposit accounts are sometimes referred to as…
A
Bonds, not to be confused with investment bonds or corporate bonds
9
Q
What are some other terms for structured deposits?
A
- Guaranteed investment account
- Deposit plan
10
Q
What does a typical structured deposit offer?
A
The greater of:
1. The original investment
2. A % of the change in FTSE 100
11
Q
What are the drawbacks of structured deposits?
A
The typical term is 5+ years, during which inflation takes a toll, and the only guarantee is the original sum
12
Q
What are the similarities between structured deposits and structured products?
A
- Capital protection
- Index-linked returns
13
Q
What is the difference between structured deposits and structured products?
A
Structured products use derivatives = counterparty risk, whereas deposit-takers have obligation to repay investor
14
Q
What is a typical minimum balance for a foreign currency deposit?
A
$10k
15
Q
What are the optional ISA flexibility rules?
A
Withdrawals can be made & replaced within the same tax year without affecting subscription limit
16
Q
What are eligible investments for cash ISAs?
A
- Bank & building society accounts
- Money market unit trusts & OEICs
- UCITS or life policies likely to return 95% within 5 years
- NS&I Direct ISA
- Stakeholder cash deposit products
17
Q
What ISAs does NS&I offer?
A
- Direct ISA
- Junior ISA
18
Q
Does the NS&I Direct ISA use the ISA flexibility rules?
A
No
19
Q
NS&I income bonds have a minimum age of..?
A
16
20
Q
What is the notice period for NS&I income bonds?
A
None
21
Q
What do NS&I income bonds offer?
A
Variable monthly interest with no risk to capital
22
Q
What are the two types of NS&I bank accounts?
A
- Investment Account
- Direct Saver
23
Q
Who is eligible for NS&I Savings Certificates?
A
Those with maturing certificates
24
Q
What is the difference between Guaranteed Growth/Income Bonds?
A
Growth = interest paid annually
Income = interest paid monthly
25
What is the minimum amount for Guaranteed Growth/Income Bonds?
£500
26
What are the characteristics of Green Savings Bonds?
1. Fixed interest of 1.3%
2. Fixed term of 3 years
3. Interest added annually
4. Available online to those aged 16+
27
What are the money markets?
Wholesale markets where banks, the Govt. etc. lend to each other
28
What is traded on the money markets?
Short-term debt instruments
29
How can private investors participate in the money markets?
Via specialist collective investment vehicles
30
Why are the money markets attractive to lenders?
1. Low credit risk
2. Liquid – securities can be sold
31
Why are the money markets attractive to borrowers?
Fixed, low interest rates
32
What are the three main types of money market instruments?
1. Treasury bills
2. Commercial bills
3. Certificates of deposit
33
What does the Debt Management Office do?
Uses Treasury bills to manage Government's daily cash flow needs
34
How are Treasury bills routinely issued?
Weekly auctions
35
What are usual terms for Treasury bills?
1, 3, 6 or 12 months
36
What is the minimum investment for Treasury bills?
£500k
37
How are Treasury bills occasionally issued outside weekly auctions?
On an ad hoc basis, with maturities from 1 to 365 days
38
How can members of the public buy Treasury bills?
Through an arrangement with one of the Treasury Bill Primary Participants (banks)
39
What is the coupon on Treasury bills?
Zero
40
What is the return on Treasury bills?
Maturity value (e.g. £1m) - purchase price (e.g. £999k)
41
What are the benefits of Treasury bills?
1. Very low risk
2. Highly liquid
42
What is often used as the benchmark risk-free rate of return?
The prevailing rate of return on Treasury bills
43
What is a certificate of deposit?
Receipt from a bank for a fixed-term deposit
44
How do CDs compare with ordinary deposits?
More liquid = lower return
45
What is a typical term for a CD?
1-3 months
46
How is interest paid on a CD?
On maturity
47
Is interest on a CD fixed or flexible?
Fixed
48
Why are CDs more liquid than ordinary term deposits?
They can be traded on money market
49
How do commercial bills differ from Treasury bills?
Less liquid + more risk = higher yield
50
What is a typical term for a commercial bill?
30-90 days
51
What are the two types of money market funds?
1. Short-term
2. Standard
52
What are the requirements for short-term money market funds?
1. Weighted average maturity up to 60 days
2. Weighted average life up to 120 days
53
What are the requirements for standard money market funds?
1. Weighted average maturity up to 6 months
2. Weighted average life up to 12 months
54
How do money market funds compare to cash investments?
Diversification can reduce default risk, but overall risk depends on credit rating of issuers
55
What are PIBS?
Permanent interest-bearing shares, a type of fixed-interest investment issued by building societies
56
What are PSBs?
Perpetual subordinated bonds, a type of fixed-interest investment issued by demutualised building societies
57
What is the position of PIBS and PSBs?
They cannot be issued as they no longer meet regulatory requirements, but can be traded on stock exchange
58
What are fixed-interest securities?
Negotiable fixed-interest long-term debt instruments
59
What are other terms for fixed-interest securities?
1. Bonds
2. Debentures
3. Loan stock
4. Loan notes
60
What are typical terms for fixed-interest securities?
2-30 years
61
Why might institutions use bonds instead of borrowing from banks?
1. Choice of term + amount
2. Choice of lenders
3. Often cheapest way to borrow
62
How is bond interest paid?
Gross, calculated as simple interest on the nominal price
63
How often is bond interest paid?
Once or (more commonly) twice per year
64
What bond prices are quoted in the press?
Clean mid-market prices
65
What does it mean when a bond is cum dividend?
The buyer receives the full period interest, so dirty price > clean price
66
What does it mean when a bond is ex dividend?
The buyer will not receive any period interest, so dirty price < clean price
67
When does a bond become ex dividend?
Seven working days before interest payment date
68
What is a eurobond?
A bond issued in a currency other than that of the country where it's issued, e.g. eurodollar or eurosterling
69
What bold yields are regularly published in the press?
1. Interest yield
2. Redemption yield
70
What are other terms for the interest yield?
1. Running yield
2. Flat yield
3. Income yield
71
What is the formula for interest yield?
(coupon / clean price) x 100
72
Define the interest yield
The annual income as a percentage of the purchase price
73
What is the formula for simplified redemption yield?
interest yield + (((gain to maturity/years to maturity)/clean price) x 100)
74
What is the income tax treatment of bonds?
Applies to all bonds & gilts
75
What is the CGT treatment of bonds?
All gilts and most corporate bonds are exempt
76
What limits the usefulness of the redemption yield?
It ignores tax
77
What happens to demand for bonds when the Bank of England base rate falls?
Demand rises, as cash deposit interest rates become less attractive
78
Which has more volatile capital value: long- or short-term bonds?
Long-term
79
What are the two main types of factors that affect bond prices?
1. Specific commercial risks to the issuer
2. Market/systematic risks affecting bonds generally
80
What are the S&P investment grade ratings?
AAA to BBB-
81
What are the S&P non-investment grade ratings?
BB+ to D
82
What are Moody's investment grade ratings?
Aaa to Baa3
83
What are Moody's non-investment grade ratings?
Ba1 to C
84
What does increasing inflation mean for bond prices?
Prices will fall as demand falls (except index-linked bonds)
85
Which has more volatile capital value: high- or low-coupon bonds?
Low-coupon bonds
86
Which has more volatile capital value: investment grade or non-investment grade bonds?
Non-investment grade bonds
87
What can be compared using yield curves?
The yield on bonds of different maturities
88
What are the three main types of yield curve?
1. Normal
2. Flat
3. Inverted
89
What do yield curves indicate?
The market's expectations for interest rates + therefore required future yields
90
What is a yield curve?
A graph of the relationship between redemption yield and period to redemption
91
What is a normal yield curve?
A rising positive curve, as investors demand higher yields for longer holding periods
92
What causes a steeper rise in a yield curve?
Expectations of high inflation and interest rates
93
What causes a flat yield curve?
Expectations of stable economic conditions
94
What causes an inverted yield curve?
Expectations of falling inflation and interest rates
95
What does an inverted yield curve mean for long-term bond yields?
They are lower than short-term bond yields
96
Does the classification of gilts reflect their original or current life?
Current life
97
How does the DMO classify shorts/mediums/longs?
<7 years / 7-15 years / >15 years
98
How does the financial press classify shorts/mediums/longs?
<5 years / 15-15 years / >15 years
99
For index-linked gilts, what changes with inflation – the coupon or the redemption value?
Both
100
How do index-linked gilt coupons compare with conventional gilt coupons?
They are significantly lower
101
What index are index-linked gilts linked to?
RPI, until 2030 when it will change to CPIH
102
What does 'repo' mean (as in 'repo market')?
Sale and repurchase agreement
103
What is a repo agreement?
One party agrees to sell gilts, then repurchase equivalent securities at a set date & price
104
How is a repo used in practice?
As a form of short-term loan with the gilts as security
105
What is the usual repo buyback period?
Two weeks
106
What does the Bank of England use the repo market for?
Influencing interest rates
107
What does 'strips' mean (as in 'strips market')?
Separate trading of registered interest & principal securities
108
Which has more volatile capital value: gilts or corporate bonds?
Corporate bonds
109
Which is more liquid: gilts or corporate bonds?
Gilts
110
Which has a greater spread between buying and selling price: gilts or corporate bonds?
Corporate bonds
111
What does it mean if a corporate bond is secured?
There is a charge on certain assets, which can be seized to repay the loan if needed
112
What does it mean if a corporate bond is unsecured?
The holder ranks for repayment alongside ordinary creditors
113
What is a debenture?
A secured loan using business assets as security
114
What is a fixed charge debenture?
The charge is over a specific, identifiable asset which cannot be sold without the debenture holder's permission
115
What is a floating charge debenture?
The charge isn't for any specific asset and has a lower priority for repayment than a fixed charge
116
What are convertible bonds?
Usually unsecured loan stock with the option to convert to ordinary shares
117
What is the exception to bonds' CGT exemption?
Convertible bonds
118
What is a FRN?
Floating rate note, a bond with coupon linked to a money market rate e.g. SONIA
119
How much is one basis point?
0.01%
120
What are the available terms for Guaranteed Growth Bonds?
1, 2, 4, or 5 years – with different interest rates for each
121
When the price of a bond falls, what happens to its yield?
It adjusts upwards, as the coupon is fixed
122
True or false: companies may always continue to issue more bonds
True
123
Index-linked gilts use RPI from how long before each payment date?
1. Eight months (issued before Sept 2005)
2. Three months (issued from Sept 2005)
124
Does CGT exemption apply to index-linked gilts?
Yes
125
Does income tax apply to interest on index-linked gilts?
Yes
