Week 1 Flashcards
(18 cards)
Whats the different between simple and compounding interest?
Simple interest is what you make after 3 years from investment whereas compounding you essentially make interest on top of the interest, it interests what you interested.
In basic what is the concept of time value of money and how does interest and inflation rates impact it?
Time value of money is the concept that money today is worth more than it is in the future, however by investing, your future money could be worth more due to interest rates thus stopping the concept. However, inflation fuels this concept.
Whats the concept of risk return principle?
Risk is the uncertainty you take in the unknown, return is the reward for taking the risk and it pays off. The more risk, the higher the reward.
Inflation and investment return is basic in that if you earned 5% and inflation is 3%. What are you really getting?
2%
What are the 3 asset classes in basic with a small description?
Cash- Safe and low return
Bonds- Medium risk, fixed income
Stocks- Higher risk, higher potential
Give me a basic risk diversification?
Spread investments, dont keep them all the same, dont have all eggs in same basket, this way your investments won’t all become damaged.
What are the types of risk with a small description?
Inflation Risk- money buys less over time
Interest rate risk- bonds go down when interest goes up
liquidity risk- hard to sell
Capital Risk- Losing all your initial money
Currency risk- Losing money due to foreign exchange
Shortfall risk- Failing to reach goals
Why might a company use cash deposits?
Think Berkshire Hathaway.
Cash if safe, easy and low return. Its great for protecting wealth
Cash deposits protect wealth. Explain why this statement is correct?
Because the cash is not invested it will not lose money, it is only affected by the time value of money which you can calculate.
What are the different types of cash accounts?
Instant accounts, notice accounts, fixed interest/ fixed term bond and current/ savings accounts.
Explain the different types of cash deposit accounts?
Instant account you can take money out of instantly
Notice accounts you must tell before taking money out
Fixed interest/ fixed term bond accounts are usually locked in that people use them to make money
Current/ savings, whilst current is an instant account, savings can be too but is not designed to be.
offshore accounts
What type of bonds are the safest?
Government backed bonds.
What are the 4 ways to measure risk?
Standard deviation (volatility of returns)
Alpha (Outperformance vs benchmark)
Beta (movement compared to market)
Sharpe ratio (return per unit of risk)
Give me 5 reasons a company would use cash deposits?
Great for emergency funds
You can access funds quickly if there is for example an unpaid debt due
Low risk holding large amount of cash
You can save up money and earn interest
Allows investors to move their money from investments to re-diversify if needed
Whats an offshore account and its benefit?
You hold an account in a different country where you might have tax benefits
What does NSI stand for?
Nation savings & investments
What is an NSI?
It’s a government backed savings account, you can earn interest from and is very safe. Its almost like a bond without risk
