Learning Outcome 1

Question 1

Instant Access Accounts

Answer 1

Lowest AER
Liquid funds
Bank accounts where you have instant access to your money, either withdrawing as cash or to pay via debit card

Question 2

Notice Accounts

Answer 2

Higher AER
You must give notice to make withdrawals
Penalties for not giving notice

Question 3

Term deposits

Answer 3

Highest AER
Money is set aside for a fixed term - Can be years
Penalties for early withdrawal

Question 4

What is the early withdrawal penalty, in monetary terms, if fully encashed after 1 year of investment?

£20,000 invested - 1.25% interest - 30 day loss penalty for early withdrawal

Answer 4

£20,000 x 1.25% = £250 interest

30 (days penalty) ÷ 365 (days in year) x 250 (interest) = £20.55 interest penalty

Question 5

NS&I investments

Answer 5

• Gov backed savings regime
• No investment products, cash only
• Not FSCS protected as Government owned
• A diminished range of products

Question 6

NS&I Premium Bonds

Answer 6

• Essentially a lottery
• Prizes are tax free
• Can win up to £1m
• You can hold up to £50,000 worth of bonds
• No interest guaranteed

Question 7

NS&I Direct ISA / Investment Account

Answer 7

• Instant Access
• Interest paid gross but taxable

Question 8

NS&I Income Bond

Answer 8

• Instant Access
• Interest paid gross but taxable
• Interest must be paid to a separate account

Question 9

Offshore Accounts

Answer 9

• Deposit Accounts based offshore
• Usually in the channel islands or Isle of Man
• Interest is still taxable in the UK
• No FSCS protection as they are outside the EU
• There is a replica version that does very similar

Question 10

Money Markets

Answer 10

• Cash market where banks lend to each other
• Used for short term borrowing by Government + companies
• Private/direct investment limited to Wealthy - High entry levels
• Money market funds exist for lower risk collective investment

Question 11

Certificate of deposit

Answer 11

• Fixed term cash based deposits on money market
• Issued by banks
• Can be held from overnight to up to 12 months

Question 12

Treasury Bills

Answer 12

• Fixed term cash based deposits
• Very short term GILTS
• Issued by the government
• Issued under PAR value with no coupon, return is face value
• Issued on weekly basis

Question 13

Commercial Bills

Answer 13

• Fixed term cash based deposits
• Very short term GILTS
• Issued by the companies
• Issued under PAR value with no coupon, return is face value
• Issued on weekly basis

Question 14

Short term money market funds

Answer 14

• Collective investment scheme (Unit trusts & OEIC’s)
• Wide range of options
• Weighted average not exceed 60 days
• Weighted average life not exceed 120 days

Question 15

Standard money market funds

Answer 15

• Collective investment scheme (Unit trusts & OEIC’s)
• Wide range of options
• Weighted average not exceed 6 months
• Weighted average life not exceed 12 months

Question 16

Taxation of interest

Answer 16

• All interest is paid gross
• Taxable income if not in a tax free account
• Personal savings allowance available
• £1,000 basic rate tax payer (20% after)
• £500 higher rate tax payer (40% after)
• £0 additional rate tax payer (45% after)
• Must declare interest to HMRC

Question 17

Risks associated

Answer 17

• Default risk (FSCS limit £85,000)
• Inflation risk (Where interest doesn’t match inflation)
• Interest rate risk (If in fixed interest and interest rates rise)