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CeMAP 1 (Unit one) > Topic 6 (Direct Investments) > Flashcards

Topic 6 (Direct Investments) Flashcards

1
Q

What are the main financial asset classes?

A
  • cash
  • fixed interest securities
  • equities
  • property
  • ‘alternative investments’
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2
Q

What is the main principle of investment?

A

The greater the risk presented the greater the potential return

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3
Q

Describe the levels of return for CASH

A

Offers variable but low levels of return through interest with limited risk to capital

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4
Q

Describe the levels of return for SHARES

A

Offer no guarantee with regard to income payments or future capital values

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5
Q

What is a deposit based investment?

A

-where the capital is fixed but the income may vary

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6
Q

Name some types of deposit based investments

A
  • bank and building society accounts
  • national savings and investment products
  • cash ISAs
  • offshore deposits
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7
Q

Why do investors use deposit based savings?

A

-capital investment remains intact
-good for short term savings
-readily accessible
-emergency funds (no notice deposit account)
‘Rainy day money’

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8
Q

What are the 2 types of interest bearing accounts?

A
  1. Current accounts (everyday money)

2. Savings accounts (money that’s set aside)

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9
Q

What is a traditional current account?

A

An account where an individual can have their salary/wages paid

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10
Q

What accounts can arrange an overdraft?

A

A transactional current account can have an overdraft but a basic bank account cannot

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11
Q

What is a basic bank account?

A

A simplified current account which is typically aimed at those on low incomes

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12
Q

What is an interest bearing current account?

A

Provides investors with immediate access to their funds without any loss of interest

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13
Q

Explain the rates of interest for a bearing current accoung

A

Account are offered by banks that offer a higher rate of interest but will require higher minimum level of investment (1,000-10,000)
This account is free of charge

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14
Q

What is a packaged current account?

A

Offers a range of ancillary benefits such as breakdown cover, mobile insurance, travel insurance in return of a monthly fee

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15
Q

Give some features of an Instant access savings account…

A
  • opened with as little as £1
  • immediate access
  • few limitations
  • low interest rate
  • good for short term emergency funds
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16
Q

What are the rates like for Restricted accounts?

A

The provider has certainty that the funds are available to it for a longer period so therefore rates are higher

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17
Q

Give examples of how access maybe restricted…

A
  • limiter amount of withdrawals
  • minimum period of notice
  • specifies term agreed at outset
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18
Q

What is a fixed-term bond?

A

Offers a fixed rate of return if money is saved for a fixed term

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19
Q

What is ‘Deposited protection’?

A

Where savings in bank/building society account are protected by the FSCS up to a level of £85,000 per investor per FS provider

20
Q

What is National savings and Investments?

A
  • offers a range of saving/investment products on behalf of the Government
  • deemed at low risk because all products guarantee the return of capital invested
  • interest on the income bonds are not tax free
21
Q

What are offshore account?

A

Applies to any form of investment based outside of the UK

22
Q

Give 2 ways In how offshore investment can expose the investor to greater risk?

A
  1. The account may not be in sterling and will therefore be at risk for adverse currency movements
  2. Not all offshore accounts will be protected by investor protection schemes
23
Q

HMRC and offshore account are often perceived as…

A

As a vehicle to hold monies that are not declared by tax authorities

24
Q

What are Gilts?

A

British Government securities that represent the borrowing from the government

25
Q

Why are Gilts good?

A
  1. You can know for certain how much income will be produced over a long period of time
  2. You can know how much capital you’ll get back
26
Q

What are the 3 sectors where gilts are identified?

A
  • Name (shows government department)
  • Coupon (interest paid depends on the PAR value of £100)
  • Redemption date (when government pay back capital)
27
Q

What is the calculation for working out income on guilts?

A

Income = par value x coupon percentage

28
Q

What is the ‘Redemption Date’?

A

The length of time before the Government buys back the guilt

29
Q

Describe the redemption for short-dated guilts

A

Less than 5 years to run to redemption

30
Q

Describe the redemption for medium-dated guilts

A

5-15 years to run to redemption

31
Q

Describe the redemption for long-dated guilts

A

More than 15 years to redemption

32
Q

How do the UK dept management office define the redemption categories?

A
  • short-dated guilts = 0-7 years

- medium-dated guilts = 7-15 years

33
Q

What is an index linked Gilt?

A

Where the interest payments and capital value move in line with inflation

34
Q

Gilt prices are quoted as either ‘cum-dividend’ or ‘ex dividend’, explain both

A

Cum Dividend - purchaser will receive the next coupon payable
Ex Dividend - if the purchaser buys within the 5 weeks prior to coupon date it’s paid by previous owner

35
Q

Describe the tax treatment of gilts?

A
  • exempt from capital gains

- interest is paid gross but subject to tax

36
Q

What are the returns on investment into gilts?

A
  • a fixed date of interest will be paid during the term and the investments can be sold at any time to release capital
37
Q

What are local authority bonds?

A

Can borrow money by issuing stocks and bonds that are secured in local authority assets and they offer a guaranteed rate of interest

38
Q

What are PIBS (permanent interest bearing shares)?

A

Issues by building societies to raise capital

39
Q

Give a few key point on PIBS

A
  • pay a fixed rate of interest gross half yearly
  • bough/sold one tock exchange
  • are irredeemable
40
Q

What are corporate bonds?

A

Corporate bonds are loans to commercial organisations

41
Q

Why are corporate bonds considered higher risk investments?

A

Due to the lack of government backing and they offer higher yields than gilts

42
Q

What are some key points of corporate bonds?

A
  • fixed redemption date
  • fixed redemption value
  • fixed interest rate
  • borrowing is normally long term
43
Q

What is a Eurobond?

A

It’s a bond issued or traded in a country using a different currency to the one where the bond is denominated (issued by multinational organisations and the government)

44
Q

Give the 2 main points in relation to taxation of income

A
  1. Local authors and corporate bonds pay interest to individual UK residents
  2. PIBS and Eurobonds pay interest gross without deduction of tax
45
Q

What is a structured deposit?

A

A complex and purchased deposit by a financial advisor

46
Q

Give an advantage and disadvantage of a structured deposit

A

:) - there is access go equity based returns where depositors will always get back initial investment
:( - there is a lowered potential for reward

47
Q

What is alternative finance (peer 2 peer)?

A

Involves a saver placing their money with a P2P lender who will lend money out to the businesses seeking funding (arranged via aggregating companies)

CeMAP 1 (Unit one) (16 decks)

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