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IAD PAPER 2 > Chapter 5 > Flashcards

Chapter 5 Flashcards

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1
Q

Open ended and closed ended funds

A

Collective investment schemes (CIS) which is a vehicle to aggregate many investors into a Poole of assets. Managed by a professional.

Good for less experienced investors.

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2
Q

Assets within a CIS

A

Money market
Fixed income
Equities
Property.
Open ended funds are not traded on the stock exchange investors simply buy units from the distributor and then sell them back.

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3
Q

Exchange traded products (ETP)

A

These are another type of open ended fund but they are traded on the stock exchange. The share price usually reflects the underlying NAV of the assets.

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4
Q

Closed ended funds

A

Another type of CIS however they are not taking any new investors into the fund and do not allow any redemptions into the fund. Also the units in the fund are then fixed.

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5
Q

Benefits of a CIS

A

Liquidity
Access to large denomination securities
Diversification
Cost benefit
Managerial expertise

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6
Q

Unit trusts

A

A type of Open ended funds, they are constituted as trusts because they have a trust deed and the trustees manage the investments as part of the trust. These are authorised by the FCA

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7
Q

Rules for unit trusts

A

Must have trust deed
Type of investments limited
Must meet requirements with it investments
Must limit one persons investment.

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8
Q

Open ended investment companies (OEIC)

A

Nearly same as unit trust just not a trust and is a legal company. Authorised cooperate directors must be in charge of these companies.

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9
Q

Exchange traded products

A

ETP are a passive fund with very low if not zero costs to enter. The difference form index funds is they are traded publically.
Physical ETP own their own assets synthetic don’t own the assets.

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10
Q

Benefits and limitations of passive ETPs

A

Benefits = low costs, minimal trading, real time pricing, very transparent,
Limitations = changes can be at elevated prices, cash drag, don’t employ risk, market risk, losses can be amplified

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11
Q

Exchange traded commodities

A

They aim to track the performance of the underlying basket of commodities.
Can be bought within an isa.

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12
Q

Closed ended funds

A

Investment trusts are one example.
This is a public company that is run by a board of directors.

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13
Q

Gearing

A

Closed ended funds can borrow against the value of the investment where open ended can’t as they are constantly changing in size.

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14
Q

Performance characteristics of investment trusts

A

Can provide better performance due to.
Freedom in investments
Does not have the same liquidity requirements meaning longer stratergies can be used.
Can gear up to to enhance returns.

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15
Q

Rela estate investment trusts

A

Can be more volatile than direct property purchase but does pay let stamp duty of 0.5%.

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16
Q

Advantages of real estate investment trusts

A

Page 377

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17
Q

Offshore funds

A

This is an investment in a foreign country usually that has favourable tax regulations. This can be a benign fit to differing tax of avoiding all together.

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18
Q

Taxation of offshore funds

A

The tax depends on if they are reporting funds or non reporting funds
Reporting = this is treated as gross income so taxed at standard rates over allowances
Non reporting = same tax but cannot use allowances to offset some of the income.

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19
Q

Charges for CIS

A

This can be a % of size of fund, transaction costs of exit fees.

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20
Q

Pricing of open ended funds

A

Single pricing = this is a single price for the units/ shares in the funds which will apply to all transactions during the reporting period.
Duke pricing = this is where there is a bid price and offer price for the units in the fund.

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21
Q

Dilution levies on OEF

A

This is a charge usually for single priced funds to cover the dealing costs for managing the fund ie transaction costs so that the capital is delisted because of movements.

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22
Q

Forward and historic pricing

A

This is concerned with coming to the value of units using the NAV
Forward = this is when orders are taken using a price/ valuation at the next point, so investing blind.
Historic pricing = this is where you buy at the last valuation point.

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23
Q

Individual savings account (ISA)

A

This is a savings account with a tax rapper meaning income in free from tax, and no CGT. Up to 20k per year.

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24
Q

JISA

A

9000 a year for anyone under 18

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25
Uk onshore and offshore life assurance company products
This includes certain pension and insurance products that can be used in financial planning.
26
On shore investments
Single/ regular premium bonds, provided but life companies pay out should the life assured person die. Wife profit bonds = offer payable benefit at some future maturity or on early policy holder death. Distribution bonds = provides income by investing in bonds and then distributes this but not capital.
27
Tax treatment of onshore bonds
You can withdraw up to 5% of the amount paid into the bond tax free because the liability sits with the bond. However certain event can trigger liabilities Death Assignment for money Maturity Partial surrender Surrender
28
Chargeable events acronyms
DAMPS
29
The main benefits of offshore investment bond
What can be held - cash, equity , hedge funds Benefits Income and growth is free of income and CGT Withdrawals up to 5% not tax Can be gifted without crystallisation Help with regular distributions and long term planning.
30
Portfolio bonds vs capital redemption bonds
Proftfolio bonds = wealthy investors, allow selection of investments, operate like a normal bond, no longer tax efficient so not really used Capital redemption bonds = life company products without insurance element, used for investment only.
31
Term assurance
7 main types of Level Increasing Renewable Convertible Decreasing Family income Unitlinked
32
Whole of life
4 main types of= Nonprofit With profit Low cost whole of life Unit linked.
33
Endowment policy
5 main types = Nonprofit With profit Low cost Low start Unitlinked
34
Private equity
These funds typically invest in delisted companies and their are multiple types of funds Bootstrap funding = this is the funding of not using external lending and keeping external debt minimal Venture capital = investment in startups to help grow. Leveraged buyouts = this is where a company is bought using borrowed funds the asset is then used a collateral for this debt. And its profits/ growth needs to cover the loan. Mezzanine finance = this is debt that represents a claim on assets but nothing else.
35
Equity co- investment
In certain circumstances a PE firm may also bring in a majority co investor alongside themselves on a purchase.
36
Structure of PE firms
General partner Limited partner Diagram = page 404
37
Enterprise investment schemes
EIS this is designed to help smaller higher risk business raise finance. By offering a variety of tax reliefs. But their are rules: Perment establishment in uk Unquoted No arrangements to become listed Cannot control another company unless that business qualifies.
38
EIS reliefs
Income tax = up to 1m of an EIS at 30% of cost of the shares CGT = profit on shares are not liable for CGT Loss relief = losses can offset income EIS shares qualify for Business relief meaning if held for 2 years or more then IHT free
39
Seed enterprise investment schemes SEIS
This is to help early stage business grow and part of the governments effort to boost entrapaunership. Conditions for this Page 407
40
Summary of tax reliefs for EIS and SEIS
EIS= Income tax reliefs on £1m invested = 30% after three years, dividend EIS taxable, CGT exempt after three years, IHT free. VCT= 200k investment max = 30% income relief and dividend exempt or 5 years , no CGT but are IHT liable SEIS= 200k investment = 50% income after 3 years. Dividend is taxed, no CGT after three years, IHT free.
41
Derivatives
These are financial contracts which the value is formulated form the underlying assets. They can be used for Hedging Arbitrage Speculation Antipating further cash flow Asset collection
42
Future and forward contracts
This is where a buyer agrees a price to pay for an asset before, either getting a good deal or loosing money because of the market.
43
Distinct features of futures contracts
Exchange traded - this is where the trade on the exchange. Standardised terms - the exchange specifies the quality of the underlying asset and the quantity in each contract. Only the price can be changed nothing else.
44
Specialised derivative leagueage to understand
Long - describes the buy of a future Short - seller of a future Open - the initial trade. When opening a trade Underlying asset - this is what drives the value of the future. Basis - difference between cash price and underlying asset value Delivery date Close - when trade ends and is completed.
45
Hedging using futures
This is where you minimise the risk of one position by hedging it against the opposite happening in a future.
46
Characteristics of options
Options give buyers the right but not obligation to purchase or sell specific quantities of an asset at a pre-agreed price. Within a time period.
47
Terminology for options
Call = right to buy at some point/ price Put = sell at point/ price At the money = an option where the price is where they have agreed to buy. Out of money = when price is above the agreed price
48
Option stratergies
Call options = taking out a long call option for an asset and then pays the premium of 10p for the right to buy. If it goes the wrong way the issuer of the trade gain the premium for nothing. Put option = long out position where you pay a premium for the right to sell the underlying assets.
49
Option premiums
The premium is made up of intrinsic value and time value Intrinsic = difference between exercise and current share price Time value = the longer the time period included in the option the higher to the value.
50
Factors effecting option premiums
The underlying asset value Exercise price Time to maturity Volatility of the asset
51
Warrants
Warrant are negotiable securities issued by a company that confer a right on the holder to buy a certain of company shares at present price on a predetermined date. Warrants are issues on a stand alone basis so the right to convert is traded separately.
52
Covered warrants
These are warrants issued by a company other than the company the shares are for.
53
Contracts for differences CFDS
This refers to derivatives that are cash settled.
54
Hedge funds
These are usually unregulated although the fund managers will be regulated themselves. This just means they can invest in a larger amount of investments. These funds usually have higher entry boundaries and return but also risk.
55
Hedge fund characteristics
Page 425&426
56
Hedge fund stratergies
Market neutral = take long and short positions Equity = long and short taken on equities Arbitrage = seeking to look at pricing inefficiency and anomalies by simultaneously selling and buying investments. Rest page 427
57
Risks of hedge funds
Gearing is used Settlement Currency Dealing delays Fraud Lack of transparency Liquidity
58
Structured products
This is a term loosely used to cover a diverse and varied range of savings and investment products. That usually offer the below features Income or growth but not both Defined returns and risks Links to external measures Defined term
59
Two main catoagories for structured products
Structured investments = pre packaged investment based on derivatives or single security Structured deposits = cash backed products but can only be offered by banks which are able to accept deposits.
60
Principle protection investments
This is where investors give up a proportion of the equities growth to secure the principle they invested. Would be used when they have a fixed expense but still want to invest in the meantime.
61
Return enhanced investments
This is where if the investor accepts the full downside they can have a greater return then actual by using a leveraged upsitpde. This is used when the markets are flat of bullish. If the market goes up then the returns could be double but if it loss you pay a fee for the loss and loose principle.
62
Other types of structured products
Income based investments Strategic access investments Hybrid investments dual index products Constant proportion portfolio insurance
63
Retirement planning
This is an important tool when providing investment advice. Up to 25% of the pension can be taken tax free at the start the rest can be taken how the indervidual wishes.
64
Occupational pension scheme
His is what is provided by an employer to an employee. Two main types Defined benefit - this is a benefit paid out based on service to the company and salary Mainly replaced by defined contributions. Defined contributions = this isn’t about salary or service but a constant amount is paid into the pension so a pit builds and then this is used to pay the pension.
65
Personal pension
This is a pension managed by an indervidual either a sipp or gpp
66
Stakeholder pensions
This is a form of personal pension meeting certain requirements such as lower charges and accessible minimum contributions. Designed for lower income people.
67
Self invested personal pensions
SIPPS this allows peripheral to invest themselves within their pension In what they choose. Can contribute 3600 into each year as a min.
68
Small self administered schemes (SSAS)
This is a company scheme where the members are usually all company directors.
69
Annuities
This is where you convert the pension pot into a guaranteed income usually with a life assurance company. There are four main types Lifetime = hands over all or part of the pension value for the remainder of the life of the investor. Impaired life = they pay higher amounts if the person is suffering certain medical conditions Enhanced = available to poor health people so payments are higher as chances are time will be less. Differed annuities = pay lump sum or income at a future date.
70
Annual allowance
Contribution into a person pension are usually considered net of the 20% tax you can get this back through a self assessment. The annual allowance is 60k gross anything above this will be charged at a marginal rate.
71
Tapered annual allowance
For people with income above 260kpa the allowance is reduced by £1 for every £2 above the limit. To a max reduction to 10k
72
Money purchase annual allowance
The allowance is replace but the above when an indervidual start drawing their pension the MPAA is 10k
73
Types of fees on a pension scheme
Annual Admin fee Contribution charge Fund charge Exit fee

IAD PAPER 2 (8 decks)

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