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Investment, Risk and Taxation > 5 - Investment Products (14/80) > Flashcards

5 - Investment Products (14/80) Flashcards

1
Q

Open-Ended Funds

A

Unit Trusts / OIECs

Price = NAV
Issues new shares when investors buy; sell back to fund
‘Dilution levy’ fee charged when entering/exiting (covers trading fees so NAV isn’t diluted)

Liquidity
Access large securities
Diversification
Spreads cost
Management expertise
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2
Q

Closed-Ended Funds

A

Investment trusts

Shares sold on exchanges - no changes to float
Price = market value
Trades at premium/discount to NAV

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3
Q

Open-Ended Investment Collectives / ICVC

A

Structured as a company
Run by an ‘authorised corporate director’
Pays dividends, not distributions

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4
Q

Unit Trust

A

Structured as a trust

Pay distributions, not dividends

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5
Q

ETF advantages

A

Prices quoted in real time
Shares traded throughout the day
Lower charges and no Stamp Duty

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6
Q

Investment Trust

A

Traded on exchanges
Run by board of directors

More relaxed rules on security types and NAV concentration
Allowed to gear
Can be split into growth and income shares

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7
Q

Investment Trust Shares

A

A shares -> ordinary w/ no voting rights
Zero dividend preference -> no income
Stepped preference -> income grows at set rate
Income and residual capital -> highly geared
Packaged units -> packages of capital, income and zero shares
C shares -> helps raise capital
S shares -> launches new trust with similar strategy
Convertibles

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8
Q

REIT advantages and rules

A

Exempt from corporation tax and CGT
>90% of rent must be paid out
<40% NAV in any one property
0.5% SD instead of SDLT

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9
Q

Collectives Taxation

A

CGT - Open, Closed, REIT exempt

Income

  • Open: dividend vs savings depending on FI %
  • Closed: dividend rates
  • REIT: dividend or property income
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10
Q

Types of Offshore Fund

A

Reporting - report to HMRC, taxed at CGT rates
-> distribute 85% of investment income

Non-reporting - don’t report, taxed at income rates, can roll up CG and income
-> Useful for tax sheltering

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11
Q

Fund Pricing

A

Open-ended

  • Single = One simple NAV
  • Double = Manager bid and offer prices
  • Forward = based on price paid by orders (blind)
  • Historic = based on last valuation

Closed-ended
- Premium or discount to NAV

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12
Q

ETFs - Physical vs Synthetic

A

Physical = own underlying assets

Synthetic = replicated through derivatives
-> Offer up securities as collateral, in exchange for mimicking an index

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13
Q

Synthetic ETF Risks

A 
Counterparty = lender/etc. fails to meet obligations
Collateral = collateral offered defaults etc.
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14
Q

Tax-Efficient Savings

A

ISA = £20,000 allowance, >18 (S&S), >16 (Cash)

LISA = £4,000 allowance, 25% bonus, 18-50

HtB ISA = £1,000 max, £200/m, max £3,000 bonus -> can contribute until 2029

Innovative Finance ISA = £20,000 limit, P2P lending

CTF/JISA = for children; CTF discontinued in 2011; £9,000 limit

Investment bonds

NS&I

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15
Q

Onshore Life Assurance

A

SP/RP bonds = encashment value depending on investments

Unit-linked bonds = premiums buy units in a life co. fund; no sum assured (life cover built in to product)

With-profits bonds = premiums invested by life co. ; receive sum assured and share of profits

Distribution bonds = separate income and capital

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16
Q

Onshore Bond Tax

A

No CGT / income tax payable (unless higher or additional taxpayer)
Can withdraw 5% of premiums paid per year

17
Q

Offshore Life Assurance (Bonds)

A

5% annual redemption; gifted without tax; don’t pay CGT on crystallisation

Income and growth accumulate within product free of income tax and CGT

18
Q

Portfolio Bonds

A

Wealthy investors can create their own portfolios with life companies

19
Q

Capital redemption bonds

A

No life assurance element; only capital is returned

20
Q

Types of Private Equity

A

Bootstrap funding = self-funding
Venture capital = early stage, high growth
LBOs = debt alongside capital
Mezzanine = subordinated debt, preference shares; junior in capital structure
Growth capital = mature companies tapping into growth

Secondaries = selling of PE shares to other investors
Equity co-investment = invest in funds outside of the main push

21
Q

Types of PE Partner

A

General partner = managers of PE funds

Limited partner = investors in PE funds

22
Q

Enterprise Investment Scheme (EIS)

A

30% income tax relief, up to £1,000,000 investment (£300k relief)
Shares must be held for >3 years (free from CGT)

Firm value must be under £15m
Must be independent and private
Max £12m EIS per firm; £20m for ‘knowledge intensive’

23
Q

Seed Enterprise Investment Scheme (SEIS)

A

50% income tax relief, up to £100,000 (£50k tax relief)
50% exempt from CGT
30% max share in target

<2 years old, <25 employees,

24
Q

Venture Capital Trusts (VCT)

A

Exchange-traded funds that hold VC investments

30% income tax relief; max £200k/year (£60k relief) (only for new issues)
No CGT
No tax on dividends paid out
Must hold for >5 years

25
Q

Distribution-Influenced Funds

A

Basically adviser-created model portfolios

Need to have no commission and fees must be similar to market
Must be compared against 3rd parties when making client recommendations

26
Q

Futures

A

Contract to buy something at a set price on a set date

Long = buyer, Short = seller
Open = initial trade, Close = trade completed
27
Q

Options

A

Gives the right, but not the obligation, to buy/sell an underlying asset

Call = but, Put = sell
Holder = buyer, Writer = seller
Premium = price paid
Strike price = specified price for underlying

At-the-money -> strike price = underlying price
In-the-money and out-of-the-money

28
Q

Option Styles

A 
American = exercised at any time
European = exercised at maturity
Asian = takes average of underlying value
Bermudan = exercised at pre-determined dates
29
Q

Call Option

A

Buyer

  • Max profit = unlimited
  • Max loss = premium paid

Seller

  • Max profit = premium
  • Max loss = unlimited

Share price can increase infinitely

30
Q

Put Option

A

Buyer

  • Max profit = strike price - premium
  • Max loss = premium paid

Seller

  • Max profit = premium
  • Max loss = strike price - premium

Share price can only decrease to zero

31
Q

Option Premium

A

Intrinsic Value + Time Value

Intrinsic Value = difference between strike price and underlying price
Time Value = gets lower closer to maturity

Also affected by:

  • Underlying price
  • Strike price
  • Volatility
  • Yield on underlying (higher yield = put > call as it pays off to hold the asset)
  • Interest rates (higher rates = call > put as it pays off to offload the asset)
32
Q

Warrants

A

Issued by companies about their stock
Right to buy X amount of shares for a prest price

Covered warrants = not written by that company but covered with warrants or shares

33
Q

CFDs

A

Derivatives settled in cash on the settlement date

Leverage limited to 30x

34
Q

Hedge Funds

A

High freedom to trade and gear; lock-in of 1-3 years; >£50,000 min.

Illiquid; opaque; heavily geared

35
Q

Absolute Return Funds

A

Target specific returns in specific timeframes
Not linked to any benchmark - state goals as ‘benchmark + X%’
Don’t need to publish results

Self-selection bias = poor funds don’t report results
Backfill bias = poor funds will only report good times
Survivorship bias

36
Q

Structured Products

A

Structured deposits = linked to cash deposit, returns linked to an index

Structured investments = packaged derivatives etc.

  • Principal protected
  • Capital at risk

Counterparty risk = body providing derivatives etc. could go bust

37
Q

Types of Structured Investment Products

A

Principal-Protected = 5-7 years maturity, return linked to an index; guaranteed capital return on maturity

Return-Enhanced = 1-3 years maturity, full downside exposure, 2-3x upside

Income-Based = pay coupons

Strategic Access = complex or hidden index

Dual Index = linked to 2 indices

Constant Proportion Portfolio Insurance = exposure to upside but protect downside

Soft Protection = guarantee capital unless returns fall below a ‘barrier’
- American barrier = daily, European barrier = at maturity

38
Q

Pension Products

A

Occupation Pensions = DB/DC; paid into by employee and employer

Personal Pensions = SIPP, GPP, retirement annuities

Stakeholder = low cost, low minimums, simple

Small Self-Administered Scheme = run for a company by directors

  • > Loans can be made against 50% of scheme assets
  • > Becomes an ‘investment-regulated pension scheme’ if <50 members and one of the members runs the investments
39
Q

Annuity Products

A

Lifetime = can be extended 5-10 years beyond death
Impaired Life = ill people/smokers etc.
Enhanced = long-term health conditions
Deferred = pension bought by insurer

Investment, Risk and Taxation (8 decks)

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