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46 Cards in this Set
- Front
- Back
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What is an investment? |
It is a current commitment of money or allocation of funds, usually in the form of an asset |
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What is the point of investments? |
To accumulate wealth over a long term or generating income from the investment |
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What is the role of a finance manager? Why are they important? |
Finance managers decide on investment opportunities. They add value for the shareholders and thus create wealth |
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What is the importance to commit money in the form of investments? |
Wealth is created by putting assets to their most productive use to earn a return. Because holding excess cash reduces your wealth due to inflation. |
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What is inflation? |
It is the rate of increase in prices over a period of time and a decrease of the purchasing value of money. |
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What are the two main causes of inflation? |
Demand-pull and Cost-push |
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Explain demand-pull inflation |
-occurs when demand from consumers pull prices up: 1. There is an increase in demand of goods and services but not enough of a corresponding increase in supply. 2. Businesses can’t scale their production quickly enough to meet the demand. As a result, prices increase. |
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Explain cost-push inflation. |
-occurs when supply cost forces prices higher. 1. Monopolies can also contribute to cost-push inflation because a monopoly controls the entire supply of a good or service. |
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What are the two types of investments? |
Real assets Financial assets |
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What is the difference between real and financial assets? |
Real assets are tangible and not as liquid as financial assets.
Financial assets are intangible/securities and they are highly liquid. |
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What are some examples of real assets? |
-residential property -commercial property -commodities: grain/ gold/platinum -collectible items such as coins and stamps |
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What are examples of financial assets? |
Bonds: government or corporate Fixed deposit Money market accounts Shares Unit trusts |
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What does liquidity mean? |
Its the ability to convert the asset to cash relatively quickly at a price close to fair market value. |
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What are the two categories under financial assets? |
-financial instruments -securities |
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What are securities? |
Financial instruments that hold value and can be traded between parties |
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What are bonds? |
Financial securities issued by companies/governments or municipalities in order to borrow from the public. |
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What are the obligations of bond issuers? |
They have to pay bondholders: - fixed interest amount or coupons annually or semi annually -the principle sum on maturity |
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What are the disadvantage and advantage of bonds? |
Advantage : are safer than shares (income and capital sum is guaranteed) Disadvantage : the return on bonds is less than return on shares |
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What are the different types of bonds? |
-straight bonds -zero coupon bonds -convertible bonds -callable bonds -perpetual bonds -treasury bonds |
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How does zeroo coupon bonds work? |
No coupons are paid, but upon maturity of bond the interest is paid on the bond and the entire par value of the bond. |
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How does convertible bonds work? |
They are converted into ordinary shares at some predetermined ratio at the discretion of the bondholder |
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What are callable bonds? |
Callable bonds may have an earlier maturity date, but the coupon rate is usually higher to compensate for higher risk |
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What are perpetual bonds? |
-it is a bond with no maturity date. Pays steady stream of interest forever |
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What are treasury bonds? |
Government securities |
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What are the advantages of fixed deposits? |
Returns tend to be higher than the more flexible savings accounts. Also, you benefit if interest rates in the market decrease. |
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What are the disadvantages of fixed deposits? |
-lack of access to the money makes them illiquid -you lose if interest rates in market increases. |
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What are the advantages of money market accounts? |
- higher deposits attract higher interest rates - safer than shares - interest and principle guaranteed |
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What are the disadvantages of money market accounts? |
- larger minimum deposit is barrier to investment - return is less than shares |
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What are the advantages of listed ordinary shares? |
In long term, they outperform bonds and money market instruments -easy to buy and sell -info is easily available (annual reports and share prices) -hundreds of firms to choose from |
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What are the disadvantages of listed ordinary shares? |
- risk is higher than bonds and money market instruments -dividends not guaranteed - could lose original investment |
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What are preference shares regarded as? |
Regarded as fixed income securities because the dividend is fixed |
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What are unit trusts? |
-an investment product that allows many investors to pool money into single fund. -fund money is invested in assets like shares; bonds and money market instruments |
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What are the advantages of unit trusts? |
-allow ordinary people to invest in shares which is normally out of their reach. -reduce investment risk through diversification - flexible : can invest either lump or monthly payments - liquid : one can sell part or all of investment any time |
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What are the disadvantages of unit trusts ? |
-returns are earned in long term rather than short term - market may collapse and investors may lose investments |
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Why do investors want returns? |
To compensate for bearing a risk |
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What does risk mean |
A degreee of uncertainty or volatility |
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Who provides info about returns required? |
Financial markets |
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What is the return on investment? |
Total holding period return on an investment : includes capital gain and income |
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How are investment returns calculated? |
Depends on set of data |
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How is risk measures calculated? |
Variance and standard deviation |
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What info does financial markets provide? |
Provides us with info about the return required for various levels of risk Greater the risk, the higher the return investors require to compensate for bearing a risk Higher risk means less certainty |
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What is a return? |
A benefit an investor receives from an investment, expressed as a percentage and calculated over 1 year. |
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How can an investor calculate return and risk? |
Depends on whether you are provided with historical or forecast data: - mean/ expected return; variance; standard deviation of returns |
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What is the total holding period return on an investment also known as? |
It is also known as the return on shareholder investment. (ROSI) |
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What does ROSI consist of? |
Two components: - capital gains or losses arising from price changes - investment income : dividends or interest received |
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How is the performance of an investment measured? |
Its measured by the percentage return. |
