Chapter 5 - Other Markets and Investments Flashcards
What are Instant Access accounts?
Cash Deposit Accounts
Cash Deposit Accounts i.e. savings, that money can be withdrawn at anytime
What are Fixed Term accounts?
Cash Deposit Accounts
Takes a year or more for money to be withdrawn.
What is the general interest rate (high or low) on cash deposit account and what does the rate depend on?
Low.
Rate % Depends on these variables:
* Size of Deposit
* Comepetition
* Inflation rate
Is interest received on a non-ISA cash depsoit account liable to income tax?
Yes. It is payed in gross (no tax reduction) and there is a limit of £1000 PA before you start to pay tax (£500 for those on the higher tax bracket)
ISAs are tax free for interest.
What are the 3 benefits of investing or holding cash?
- Liquidity
- Low volatility
- Partake in Saving Vehicles for interest returns
What are the 3 disadvantages to investing or holding cash?
- Inflation errodes any gains from interest in a savings account (over time it makes it negative in realtion to purchase power)
- Interest Rates vary and so the interest recieved will vary
- Currency Risk (especially if holding foreign currencies)
What is the FSCS?
Financial Services Compensation Scheme
A UK compensation scheme that provides protection of up to £85,000 per institiution if provider defaults or cant pay its depositers in a cash deposit account.
Its a good to have multiple bank accounts if you have over £85k> as each bank is covered. Example: if two banks failed at once, your total compensation would be 170k providing you held =>85k in each.
What is a cryptocurrecy?
A form of decentralised digital/virtual currency or asset that can be traded, stoted or transferred electronically through blockchain technology and is represented by a digital record called a ledger.
They are not issued by central banks or similar instituations (yet).
According to the FCA what are the 3 kinds of cryptocurrencies?
- Exchange Tokens (BTC)
- Security Tokens (Ones with asset ownership rights, entitlement for share in future profits, repayment of specific sum of money. tradeability)
- Utility Tokens (give access to services or products)
They are not classed as an accepted currency as they are too volatile currnetly. - but what does this mean for stable coins and do they pose a threat to fiat currency? I expect this to be updated following the new revision of the book as it is now out of date.
What are the 3 functions that money serves?
- Store of value
- Medium of exchange with which to make payments
- Unit of account with which to measure the value of any particular item that is for sale.
What are Money Markets?
Wholesale or institutional markets for cash and are characterised by the issue, trading and redemption of short-dated negotiable securities. These usually have maturity of up to one year, though more typically three months or less.
Typically only used by Institutional investors and only available indrectly to retail investers through a collective investment schmee (CIS).
Well suited for market uncertainty and only suitable for the short term.
Returns should be more than simple omey market accounts offered by a bank.
What are Capital Markets?
Long-term providers of finance for companies through investments either in bonds or shares.
What are the 3 types of UK money market instruments?
Money Markets
- Treasury Bills - usually a ZCB and bought at a discount
- Certificates of Deposits (CDs) - tradable depsoits (up to 5 years but usually around less than 6 months), fixed or vairable rated.
- Corporate Paper (CP) - Similar to treasury bill but issued by a company..
Settlement of these happens through the CREST system on TD or TD+1.
All money market funds are suceptable to exchange risk, capital risk and currency risk.
What are the similarities between cash deposits and money markets?
- Provide low-risk way to generate an income or capital return, while preserving nominal value of amount they invested.
- Play valuable role in times of market uncertainty.
But
- Unsuitable for anything other than short term as they have underperformed most asset types over medium and long term.
- Long-term returns from cash deposits, once tax and inflation have been taken into account, have barely been positive.
What two money market sectors did the Investment Association (IA) introduce?
- Short-term money market funds - NAV can have constant or fluctation NAV but must be constant whne accruing income.
- Money market funds - The NAV must be fluctuating at all times
What are the 7 features of Property as an asset class?
- Each individual property is unique (location, structure and design).
- valuation is subjective,, no centralised marketplace.
- Subject to complex legal considerations
- High transaction costs.
- Illiquid
- Diversification is difficult.
- Supply of land is finite
