Asset Classes 1 - MM Flashcards by David Bailey

How can you get a higher level at interest from a bank account?

Deposit a larger amount
Fix it to a longer term

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What is the inverse cash rate?

What longer dated deposits earn less than shorter ones

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What is the formula for discrete compound interest?

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What is the AER (annual equivalent rate)?

The true rate of interest, including compounding over a 12 month period

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What is the approx Fisher Equation for the real rate of return including inflation?

Real rate of return = nominal interest rate - rate of inflation

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What is a Requirement Linked Account?

A Bank account with a higher rate of interest due to certain conditions (e.g. minumum cash balance)

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What’s the difference between deflation and disinflation?

Deflation is a general decrease in prices

Disinflation is when inflation is falling

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Which agency has the responsibility and tools to maintain financial stability?

Financial Policy Commiteet (FPC)

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What are the maximum FSCS payouts for bank accounts?

& temp balances

Maximum compensation of £85,000 for each account holder who is an eligible claimant (ie, up to £170,000 for joint accounts), per authorised firm

Temporary large balances of up to £1 million are also covered (eg, proceeds from a house sale) for up to six months.

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Is P2P and crytocurrency covered by the FCSC?

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What are the tax implications for NS&I products?

None of NS&I’s products are subject to capital gains tax (CGT), but some are subject to income tax.

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What are the fixed terms for Green & British savings bonds?

3 years

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What is the difference between Constant NAV (CNAV) and Accumulating NAV (ANAV) money market funds?

CNAV - Constant NAV/Face Value (£1, €1 or $1 per share) - INCOME IS PAID OUT or USED TO BUY NEW FUNDS EVERY MONTH

ANAV (roll-up) funds - NAV/Value of Fund/Shares increase in. value via daily income accrual (not distributed)

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What are Low volatility net asset value (LVNAV) funds? (3 points)

Guidelines, pricing and duration

Greater sensitivity to pricing; and extra safeguards and controls are built into the structure.
Can be bought and sold at a constant price, provided that certain conditions are met – eg, the value of the assets does not deviate by more than 0.2% from its face value
Authorised for a maximum of five years, at which point only the CNAV funds may exist.

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What are Variable NAV (VNAF ) MMFs?

Use MTM accounting to value some of their assets. The NAV of these funds will vary by a slight amount, due to the changing value of the assets and, in the case of an accumulating fund, by the amount of income received

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What is called what a MMF falls below $1?

Breaking the buck

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What is amortised cost accounting and on what basis is it calculated?

Assumes that the instrument has been bought after issuance and held to maturity,
any difference between the acquisition cost and its face value is realised on a straight-line basis between those two dates

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What’s the difference between T-Bills and Commercial Paper?

Issuer, maturities, liquidity

T-bills are issued/backed by governments i.e. risk-free.
T-bills maturities - a few days to one year
Commercial paper is the same as a T-bill, except that it is issued by large corporations instead of governments.
CP less liquid than T-bills, although the liquidity premium can be small as investors typically buy and hold commercial paper to maturity

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What is a Certificate of Deposit?

Structure & Liquidity

Bank receipts (or certificates) confirming that a bank has received a sum of money from an investor. The bank agrees to repay this sum plus interest to the investor on a specific future date.
CDs are relatively ILLIQUID

What is the benchmark for MMFs?

Sterling Overnight Index Average (SONIA) – the weighted average rate of all unsecured sterling overnight cash transactions among and between UK financial institutions.
Eligible transactions are executed between midnight and 18.00 UK time, settled that same day, and are at least £25 million.

What are the US and EU equivalents of SONIA?

Euro Short-Term Rate (€STR) – €STR, is the wholesale euro unsecured overnight borrowing costs of euro area banks. It is calculated on all transactions over €1 million
Secured Overnight Financing Rate (SOFR) – this is a broad measure of the cost of borrowing cash overnight, using US Treasury debt as collateral. F

What’s the difference between P2P Lending and Crowdfunding?

P2P lending involves lending money to individuals without using a financial intermediary
Crowdfunding, seeks to raise equity from investors, rather than from borrowing.

What is the tax treatment on income from P2P Funds?

Interest - paid without tax deducted at source and must be declared in full to the tax authorities (eg, HMRC in the UK), who will calculate the liability

What is a Eurobond?

Denominated in a currency other than the home currency of the country or market in which the bond is issued.

What is a double dated bond?

Issued with two maturity dates. The issuer can give notice and choose to redeem the bond on any day between the first and final maturity dates

What are the difference in conventions for bond duration between FT and DMO?

FT Shorts <5Y Mediums 5-15Y Longs >15 DMO Shorts <7Y Mediums 7-15Y Longs >15

What are drop locks & caps for FRNs? and what is mini-max bond?

* Drop lock = interest rate becoming fixed if it falls to a specified level * Cap = if interest rates rise, the coupon also rises, but not beyond the ceiling * Mini-Max = A collared FRN with a floor and a ceiling

How do Tax Authorities treat Zero Bonds?

Tax authorities will deem the investor to have received a notional amount of income each year and tax them on that

What is the difference between subordinated and unsubordinated debt?

* Unsubordinated bonds (senior debt) carry an unconditional promise that they will be repaid before the creditor’s other obligations * Subordinated bonds (junior debt) rank after unsubordinated bonds for repayment.

What are common covenants?

* limiting further debt and its priority for repayment, * restricting the payment of dividends * restricting the sale of assets

What is the Central Government Net Cash Requirement (CGNCR)

The CGNCR represents the shortfall between: * the central government’s revenues (what money it takes in, in the form of taxes and duties), and * what it spends on running the country (eg, paying state benefits, and infrastructure projects, such as road building).

What is the Public Sector Net Cash Requirement?

It is equal to the sum of: * the central government net cash requirement (CGNCR) * the local government net cash requirement (LGNCR), and * the public corporations net cash requirement (PCNCR).

How often is interest paid on most gilts?

Every 6 months (except floaters which pay Quarterly

What is the structure of inflation linked gilts?

* interest payments (and, indeed, the capital repayment at maturity) vary in accordance with changes in inflation rates, as measured by the RPI. * there is no deflation ‘floor’ for ILGs * the government measures the RPI with a three-month indexation lag (8 months prior to Sep 2005) * the coupon quoted for an ILG is much lower than is the case with a conventional gilt

What is the other name for local authority bonds?

Corporation Stocks

What are the 2 types of local authority bonds? | LAFSs/LANLs & Difference in marketability

* Local Authority Fixed Stocks – Non-marketable fixed-rate investments - held to maturity unless redeemed early * Local Authority Negotiable Loans (Yearlings) – Marketable and have a life of no longer than two years

What are the different types of German govies?

* Bunds - 10 to 30 years * Bobls - 3 to 5 years * Schatz - up to 2 years.

What are the different types of French govies?

* bearer Obligations Assimilables du Trésor (OATs), with maturities of two to 50 years and which are sold on a regular monthly auction basis and short-term T-bills, and * Bons du Trésor à Taux Fixe (BTFs) with maturities of up to 12 months.

What is the maturity of most Japanese gov debt?

10 years

What is the minimum denomination of UK T-bills?

£500K

What is the tax position on corporate bonds? | Income & CGT

* Interest is paid gross, at specific intervals which will be set out in the bond’s terms (eg, usually half years for UK corporate loans). * CGT is not chargeable, providing that it is a qualifying corporate bond (QCB). Broadly, a QCB is one which is interest-paying, rather than a convertible; and is denominated in sterling.

What is a debenture?

corporate bonds which are backed by security, (eg, land or buildings)

What are Permanent Interest Bearing Shares (PIBS)?

PIBS are issued by building societies with the following features? * Interest is paid gross at a fixed rate, half-yearly and is taxable. * Building societies are under no obligation to pay the interest in any one year, nor to roll it over to the next year * PIBS are irredeemable. They are only repaid by an issuing building society on liquidation, in which case the PIBS holders will be the last creditors to be repaid. * Investors do not pay CGT on disposal, as the shares are classified as QCBs. * PIBS are fairly illiquid

Bond running yield calculation?

Gross Coupon / Market Price

Which National Savings and Investments (NS&I) products are tax free? | PICK

Premium Bonds ISA Certificates Kids (junior) ISA

How is default risk mitigated in P2P Lending?

* the maximum loan from a lender may be capped at a percentage of the overall amount required by the borrower, * in this way a number of smaller loans are brought together from different lenders so if the borrower stops paying it doesn’t just affect one lender.