Chapter 3

Question 1

Characteristics of the principal asset classes

Answer 1

Cash instruments
Equities
Property

Question 2

Cash investments or instruments take two main form

Answer 2

Cash deposits
money market instruments

Question 3

Comprise accounts held with banks or other savings institution.

Answer 3

Cash deposits

Question 4

they are held by a wide variety of depositors from retail investors through to companies, governments and financial institutions

Answer 4

cash deposits

Question 5

are more economical for a bank to process and will earn a better rate

Answer 5

large deposits

Question 6

involve the investor tying up their money for a fixed period of time such as one, two or three years, or which a fixed period of notice has to be given

Answer 6

Fixed-term deposits

Question 7

typically earn the lowest rates of interest of the various deposit accounts available

Answer 7

instant access deposit accounts

Question 8

this will generate an even lower rate and sometimes pay no interest at all

Answer 8

Current or checking account

Question 9

interest received by an individual is subject to

Answer 9

income tax or final tax

Question 10

the headline rate of interest quoted by deposit takers before deduction of tax

Answer 10

gross interest

Question 11

the rate of interest after tax is deducted

Answer 11

net interest

Question 12

Advantages of investing cash

Answer 12

liquidity
savings vehicle and for the interest return that can be earned on them
relative safety that cash investments have and that they are not exposed to a market volatility

Question 13

it is usually protected by a government sponsored compensation scheme

Answer 13

deposits

Question 14

this will repay any deposited money lost at a maximum deposits of

Answer 14

500k per depositer per account

Question 15

when cash is deposited overseas, depositors should also consider the ff

Answer 15

the cost of currency conversion
the creditworthiness of the banking system
the tax treatment of interest applied to the deposit

Question 16

are the wholesale or institutional markets for cash and are characterized by the issue, trading and redemption of short dated negotiable securities

Answer 16

money markets

Question 17

these can have a maturity of up to one year, through three months or less is more typical

Answer 17

money markets

Question 18

are long term providers of finance for companies, either through investment in bonds or shares

Answer 18

capital markets

Question 19

often subject to a relatively high minimum subcription and therefore tends to be more suitable for institutional investors

Answer 19

direct investment in money market instruments

Question 20

examples of main types of money market instruments are

Answer 20

treasury bills
certificate of deposits
commercial paper

Question 21

these are usually issued weekly by or on behalf of governments, and the money is issued to meet the governments short term borrowing needs

Answer 21

treasury bills

Question 22

are non-interest bearing instruments

Answer 22

treasury bills

Question 23

sometimes referred to as zero coupon instruments

Answer 23

treasury bills

Question 24

these are issued by banks in return for deposited money

Answer 24

certificates of deposits

Question 25

it is a short term marketable instruments with a maturity of up to 5 years, although the vast majority are issued for periods of less than 6 months

Answer 25

certificates of deposits

Question 26

this is the corporate equivalent of a treasury bills

Answer 26

commercial paper

Question 27

is issued by large companies to meet their short term borrowing needs

Answer 27

commercial paper

Question 28

is simply evidenced by holding the instruments although, in practice, these are immobilized centrally in vaults by central securities depositories or similar agencies

Answer 28

Ownership

Question 29

is a highly professional market that is used by banks and companies to manage their liquidity needs

Answer 29

money market

Question 30

it is essentially a savings account that typically requires a substantial minimum balance and notice period

Answer 30

money market account or money market deposit account

Question 31

is actually a money market mutual fund

Answer 31

money market fund

Question 32

a collective investment scheme which pools investors money to invest in short term debt instruments such as treasury bills and commercial paper

Answer 32

money market fund

Question 33

can be used as a temporary home for idle cash balances rather than using a standard retail deposit account

Answer 33

money market deposit accounts

Question 34

for this investor, these accounts can at times offer higher returns that can be achieved on standard deposits, and are offered by most retail banks

Answer 34

retail investor

Question 35

can be the vehicle for holding such asset allocations and are in competition with other short term deposit accounts

Answer 35

money market investments

Question 36

are essentially IOUs

Answer 36

bonds

Question 37

types of bonds

Answer 37

government bonds supranational bonds corporate bonds

Question 38

generally less risky than shares, providing that their issuers remain solvent

Answer 38

bonds

Question 39

issued by national governmemts

Answer 39

government bonds

Question 40

are issued by agencies such as the european investment bank and the world bank

Answer 40

supranational bonds

Question 41

are issued by companies such as large banks and other large listed companies

Answer 41

corporate bonds

Question 42

investments such these have been regarded as being of particularly low risk as it has been regarded as unlikely that a government will default

Answer 42

government bonds

Question 43

can face more real default risks, namley that the company could go bust

Answer 43

corporate bonds

Question 44

the major reason an investor would prefer equities over bonds is the potentially greater benefits that can arise from owning shares

Answer 44

dividends

Question 45

each individual property is unique in terms of

Answer 45

location structure design

Question 46

is subjective, as property is not traded in a centralized market, and continuous and reliable price data is not available

Answer 46

valuation

Question 47

is subject to complex legal considerations and high transaction costs upon transfer

Answer 47

property

Question 48

refers to the trading of one currency for another, it is by far the largest market in the world

Answer 48

forex market

Question 49

aimed to prevent speculation in currency markets by fixing all currencies to gold at a fixed rate of 35 dollar per ounce

Answer 49

bretton woods agreement

Question 50

trading in currencies became 24 hour as it could take place in the various time zones

Answer 50

asia europe america

Question 51

it is located between the asian and american time zomes

Answer 51

london

Question 52

other large centres includes

Answer 52

us singapore. hongkong japan

Question 53

the most commonly quoted currency pairs are

Answer 53

us dollar and the japanese yen euro and us dollar us dollar and swiss franc british pound and us dollar

Question 54

when currencies are quoted the first currency is the and the second is the

Answer 54

base currency counter or quote currency

Question 55

is always equal to one unit of that currency, in other words, one pound, one dollar or one euro

Answer 55

base currency

Question 56

when the exchange rate is going up, it means that the value of the base currency is rising relative to the other currency and is referred to

Answer 56

currency strengthening

Question 57

and when the opposite isbthe case the currency is said to be

Answer 57

weakening

Question 58

when currency pairs are quoted, a... will quote a bid and ask price

Answer 58

market maker or forex trader

Question 59

is an otc market where one brokers or dealers negotiate directly with one another

Answer 59

forex market

Question 60

types of transactions undertaken in forex market

Answer 60

spot transactions forward transactions futures swaps

Question 61

is the rate quoted by a bank for the exchange of one currency for another with immediate effect

Answer 61

spot rate

Question 62

in this type of transactions, money does not actually change hands until some agreed future date

Answer 62

forward transactions

Question 63

standardized versions of forward transations that are traded on derivatives exchange

Answer 63

futures

Question 64

in this, two parties exchange currencies for a certain length of time and agree to reverse the transactions at a later date

Answer 64

swaps

Question 65

is an agreement between two parties to either buy or sell foreign currency at a fixed exchange rate for settlement at a future date

Answer 65

forward exchange contract

Question 66

is typically achieved through the same settlement systen that is used for equities and bonds, and is commonly settled on the day of the trade or the ff business days

Answer 66

settlement of stock market trades

Question 67

2 major advantages of money market funds than money market accounts

Answer 67

pooling of funds with other investors returns on money market fund is greater than money market accounts

Question 68

is the exchange rate set today, even though the transaction will not settle until some agreed point in the future

Answer 68

forward exchange rate