Chapter 6- Investing in cash and bonds Flashcards
What are the different type of interest rates paid on cash deposits?
There can be variable rates
and fixed rates
Tiered rates- higher rate of interest is offered on larger sums
What can be the penalty charges if deposit is withdrawn immediately?
- Loss of interest on amount withdrawn
-reduction in rate of interest paid
for NS&I products= no interest is paid if product is surrendered in the first year
REDUCED OVERALL RETURN
What is the tax treatment on cash deposits?
Interest is SUBJECT TO INCOME TAX
Savings allowance:
basic rate=£1,000
Higher rate= £500
Additional rate don’t have a savings allowance and their entire savings is taxed at 45%
What are the features of cash ISAs
£20,000 is tax-free
-investor must be 16 and over
-must be resident in the UK unless they are Crown Employee serving overseas
What are the features of Foreign Currency Accounts?
Savings account in another currency
- available in UK or overseas bank
-Minimum balance to open is high
-interest rate depends on the market and chosen currency
What are the features of offshore accounts?
-Offshore accounts in sterling from UK branches of banks and building societies situated in low tax jurisdictions, such as the Channel Islands or the Isle of Man.
-interest is paid gross and LIABLE TO INCOME TAX
What is the purpose of Money Market Instruments?
- An environment where GOV and large institutions/companies can borrow and lend money to meet their SHORT-TERM needs
-Individual investors can access money markets by trading in money market instruments
-Low risk route for compelling return BUT minimum investment amount is high
Money Market Instruments- Treasury bill, Commercial Paper, Certificate of Deposits.
What are the features of Treasury Bill (Money Market Instrument)?
-Issued by UK GOV, term of 3 months-1 year
-NO interest over term
-issued to investors at a discount
-Face value returned to investor on maturity of investment
What are the features of Commercial Paper (Money Market Investment)?
Corporate equivalent of a treasury bill which is issued by companies,
term of 3 months-1 year
-HIGHER risk than Treasury Bill
What are the features of Certificate of Deposits (CD) Money Market Instruments?
Issued by Commercial Banks, term 3 months-1 year BUT pays higher rate of interest over term
What are NS&I products?
Savings and investment products provided to the public to raise funds on behalf of the UK GOV
products:
-Direct ISAS= Cash ISA, withdrawals without notice, Transfers from other provider is NOT allowed
-Direct Savers= instant withdrawals
-Investment account= managed by POST only, withdrawals can be made without notice and penalty
*interest is paid gross and taxable for Direct Savers and Investment accounts
Other NS&I products?
-premium bonds= bonds entered into a monthly draw in which there can be winnings of up to £1 million or smaller amounts which are TAX FREE
-Fixed Interest Savings Certificate= fixed rate of return over a period of time 2-5 years, guaranteed return for the term and TAX FREE on maturity
-Index-linked Savings Certificate= lump sum insured, return is guaranteed and linked to inflation rate RPI, 5 year term. Returns are TAX FREE
-Junior ISA= TAX FREE savings account for a child. Annual contribution is £9,000
-Income Bonds= Pay monthly income and have no set term. Holder can withdraw money without notice. interest is variable and tiered, paid gross (taxable)
Main features of bonds (fixed interest securities)
GOV, companies and other institutions often raise long-term finance by ISSUING BONDS
-Bonds are offered at fixed rates and repayable at a specified date (can be issued up to 30 years)
The 3 main key features on Bond Titles?
e.g.
Name: Treasury Gilt= identifies who issued the bond and is liable for the interest payments and repayment of principal; in this case the UK GOV
Coupon: 4%= interest payable, usually fixed, most bonds pay TWICE a year on dates specified at the time of issue
Maturity date: 2023= identifies year when the carrier, will pay NOMINAL value of the bond of investor who owns it
An example of a conventional bond in when bonds are repaid on one of the specified coupon dates
-some interest payment and capital due at maturity is uplifted for inflation RPI
-some don’t pay interest at all and instead pay all of the return as capital
What is the tax treatment of bonds held directly?
Income (coupon):
-The interest, or income, received from bonds is subject to income tax in the year it is paid.
Gilts and corporate bonds pay interest gross of income tax. However, this is taxable as savings income at 0%, 20%, 40% or 45% (once it has risen above the personal savings allowance).
Disposal on Maturity:
-Gains made on disposal or maturity of gilts and corporate based bonds are CGT FREE
