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104 Cards in this Set
- Front
- Back
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What are the two main characteristics of cash deposits? |
The investor receives regular interest on their deposits at the prevailing rate.
The investors capital is not exposed to investment risk. |
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What is the maximum compensation payable under the FSA compensation scheme to cash depositors? |
£75,000 |
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What are the two main types of restricted access deposit accounts? |
Notice accounts
Term or time deposits |
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What does the term 'negotiable' mean when referring to fixed interest securities as negotiable securities? |
Negotiable means that, after being issued,the security can be traded on the secondary market ,and the price of the security varies with market conditions. |
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What does nominal or par value of a gilt determine? |
The price at which the stock will be redeemed by the issuer at the redemption date. |
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What does nominal or par value of a gilt determine? |
The price at which the stock will be redeemed by the issuer at the redemption date.
The amount on which the interest that will be recieved is calculated using the bonds coupon. |
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What does the interest or running yield measure and what is the formula? |
The interest yield measures the income return an investor reviewed on the amount paid for a bond. The formula is:
Coupon / clean price * 100 |
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Which are more volatile: bonds with long periods to maturity and low coupons or those that are short dated with high coupons? |
The most volatile bonds are those with a long maturity and low coupons. |
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Which are more volatile: bonds with long periods to maturity and low coupons or those that are short dated with high coupons? |
The most volatile bonds are those with a long maturity and low coupons. |
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What is a reverse yield curve and how does it differ from a normal yield curve? |
A reverse yield curve indicates that yields are lower for longer dated bonds than for short dated ones, that is, the yield curve falls from left to right. This is the opposite to a normal yield curve,which rises from left to right to reflect the higher yield usually required for investors to hold longer dated bonds. A reverse yield curve occurs temporarily. When long term interest rates are substantially below current short term levels and short term interest rates are expected to decline. |
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Do corporate bonds generally offer higher or lower yields that gilts? |
higher. |
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What two factors tend to influence the price movement of an individual share? |
Future expectations
Historic and current knowledge of company's performance. |
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Is a rise in interest rates likely to raise or depress the share price of building companies? |
A rise in interest rates is likely to depress builders share price as higher mortgage costs could deter house buyers. |
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Is a rise in interest rates likely to raise or depress the share price of building companies? |
A rise in interest rates is likely to depress builders share price as higher mortgage costs could deter house buyers. |
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To what extent is preference share comparable to a corporate bond? |
Preference shares are similar to bonds in that they pay a fixed income in the form of a dividend that has preference over normal dividends. However,tax is not reclaimable on preference share dividends,whereas it is on bond interest. Also,preference shares are often issued with redemption dates. |
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Which type of share ranks lowest if a company goes into liquidation? |
Ordinary shareholders. |
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A client is considering investing in listed private equity companies. What are the risks associated with this type of investment? |
Whilst private equity can deliver high returns,there is a high risk of losses as some of the companies in which the fund invest will fail and others will not grow quickly.
Recession
Less liquid. |
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What is a P/E ratio and what does it tell an investor about potential for growth in the share price? |
P/E ratio compares the company's share price with its earnings per share.
Indicates that the investors are optimistic about future earnings growth of a company.
Does not indicate if share price will rise all fall. |
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Why might it be appropriate to include property within an investment portfolio? |
Additional diversification.
Property value tends to follow business profitability.
Less volatile than stock markets.
Protection against inflation. |
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What are the disadvantages of investing in works of art? |
Usually don't generate income.
Demand is driven by tastes of collectors.
Authenticity can be difficult to prove.
High costs involved in buying and selling.
Difficult to diversify.
Specialist knowledge is needed to buy successfully. |
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What are the disadvantages of investing in works of art? |
Usually don't generate income.
Demand is driven by tastes of collectors.
Authenticity can be difficult to prove.
High costs involved in buying and selling.
Difficult to diversify.
Specialist knowledge is needed to buy successfully. |
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what are the two broad classifications for commodities? |
Hard commodities - products of mining and other extractive processes.
Soft commodities - typically grown. |
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Why should investors pay attention to political developments? |
A government's policy changes can have an important impact on economic and financial conditions. Political developments can change the investment climate,both for the economy and for individual sectors. |
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Why are international developments increasingly important for investors? |
National economies have become increasingly integrated and financial markets move more and more in step, so investors have to have an international perspective when allocating assets. |
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Why are international developments increasingly important for investors? |
National economies have become increasingly integrated and financial markets move more and more in step, so investors have to have an international perspective when allocating assets. |
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What are the four main phases of the business cycle? |
Recovery / expansion Boom Slowdown or contraction Recession |
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Why are international developments increasingly important for investors? |
National economies have become increasingly integrated and financial markets move more and more in step, so investors have to have an international perspective when allocating assets. |
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What are the four main phases of the business cycle? |
Recovery / expansion Boom Slowdown or contraction Recession |
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How can the business cycle affect the stock market? |
Share prices generally begin to recover while the economy is in recession, falter when interest rates are raised to curb inflation in a boom and fall back as the economy slows down. |
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How may a government's fiscal policy affect the behaviour of individuals and companies? |
The different tax treatment of different types of assets will influence investment decisions.
The tax treatment of a company 's earnings will affect its dividend policy and whether it raises capital through debt or equities. |
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What are the two main measures of money supply,and what do they comprise? |
The most commonly quoted measures of money supply in the UK are M0 (narrow money) and M4 (broad money)
M0 comprises notes and coins in circulation, plus all instant access and time deposit accounts of UK residents with UK banks and building societies.
M4 comprises notes and coins in circulation, plus all instant access and time deposit accounts of UK residents with banks and building societies. |
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What are the two main measures of money supply,and what do they comprise? |
The most commonly quoted measures of money supply in the UK are M0 (narrow money) and M4 (broad money)
M0 comprises notes and coins in circulation, plus all instant access and time deposit accounts of UK residents with UK banks and building societies.
M4 comprises notes and coins in circulation, plus all instant access and time deposit accounts of UK residents with banks and building societies. |
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What are the effects when the Bank of England reduces short term interest rates? |
It eases monetary policy.
Longer term interest rates will reduce.
More people willing to spend and borrow.
Those dependant on income from cash deposits will be worse off. |
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How does a country's balance of payments current account affect currency values? |
Surplus means that the country exports more than imports.
The currency will strengthen as buyers will have to acquire currency to pay for goods. |
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How do exchange rates impact on investment in the domestic and foreign markets? |
Investments in overseas markets or from selling products overseas is affected by the exchange rate. |
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What does standard deviation measure? |
The standard deviation measures how widely the actual return on an investment varies around the mean or expected return. The greater the standard deviation,the greater the volatility and the associated risk. |
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What does beta measure? |
Beta measures the sensitivity of a security to a market. |
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What does beta measure? |
Beta measures the sensitivity of a security to a market. |
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What type of risk can be eliminated by holding a diversified portfolio? |
Non systematic or investment specific risk. |
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What does beta measure? |
Beta measures the sensitivity of a security to a market. |
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What type of risk can be eliminated by holding a diversified portfolio? |
Non systematic or investment specific risk. |
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Why,in theory,should investment managers construct portfolio that lie on the efficient frontier? |
The efficient frontier represents the set of portfolios that have the best risk reward tradeoffs,so for any level of risk the portfolio on the frontier with that level of risk will give the best return for an investor. |
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What is usually used as representing a risk free asset in the CAPM equation? |
Ninety one day treasury bills, as there is virtually no default risk and, because of their short life interest and inflation risks are minimal. Another risk free rate that is less commonly used is the long gilt yield. |
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What is usually used as representing a risk free asset in the CAPM equation? |
Ninety one day treasury bills, as there is virtually no default risk and, because of their short life interest and inflation risks are minimal. Another risk free rate that is less commonly used is the long gilt yield. |
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How does APT differ from CAPM? |
APT is based on the belief that there is more than one type of risk that influences security returns, with different securities having different sensitivities to each risk. |
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What are the three forms of EMH, and what information do they consider? |
Weak from efficiency. This states that the current security prices fully reflect all past price and trading volume information and future prices cannot be predicted by analysing this type of historic data.
Semi strong efficiency. This states that security prices reflect all information that any investor can acquire.
Strong form efficiency. This states that security prices reflect all information that any investor can acquire. |
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What are the three forms of EMH, and what information do they consider? |
Weak from efficiency. This states that the current security prices fully reflect all past price and trading volume information and future prices cannot be predicted by analysing this type of historic data.
Semi strong efficiency. This states that security prices reflect all information that any investor can acquire.
Strong form efficiency. This states that security prices reflect all information that any investor can acquire. |
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How does behavioural finance explain market anomalies? |
Behavioural finance highlights inefficiencies caused by the irrational way in which investors react to new information which causes market trends and speculative bubbles. |
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Is inflation usually a major consideration for short term investment? |
No, maximising nominal returns with investment safety is normally more important, although inflation could be a major issue in periods of high inflation. In periods of low inflation, it is more of an issue for longer term investment. |
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Is inflation usually a major consideration for short term investment? |
No, maximising nominal returns with investment safety is normally more important, although inflation could be a major issue in periods of high inflation. In periods of low inflation, it is more of an issue for longer term investment. |
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What are the main risks taken by an investor in a UK corporate bond? |
Interest rate risk,credit risk and inflation risk are the main risks, but event risk and liquidity risk should also be considered. |
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Is inflation usually a major consideration for short term investment? |
No, maximising nominal returns with investment safety is normally more important, although inflation could be a major issue in periods of high inflation. In periods of low inflation, it is more of an issue for longer term investment. |
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What are the main risks taken by an investor in a UK corporate bond? |
Interest rate risk,credit risk and inflation risk are the main risks, but event risk and liquidity risk should also be considered. |
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Explain the three different types of credit risk. |
The three different types are:
Default risk - the risk the issuer defaults on an interest payment or repayment capital.
Downgrade risk - the risk that credit spreads change. A widening of credit spreads will lead to corporate bonds underperforming gilts. |
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Is inflation usually a major consideration for short term investment? |
No, maximising nominal returns with investment safety is normally more important, although inflation could be a major issue in periods of high inflation. In periods of low inflation, it is more of an issue for longer term investment. |
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What are the main risks taken by an investor in a UK corporate bond? |
Interest rate risk,credit risk and inflation risk are the main risks, but event risk and liquidity risk should also be considered. |
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Explain the three different types of credit risk. |
The three different types are:
Default risk - the risk the issuer defaults on an interest payment or repayment capital.
Downgrade risk - the risk that credit spreads change. A widening of credit spreads will lead to corporate bonds underperforming gilts. |
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For an OEIC who is responsible for establishing and maintaing the register of unit holders? |
The Authorised Corporate Director (ACD) |
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What percentage of a securities fund must be in 'approved' securities? |
90% |
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What must the register for a unit trust contain? |
The name and address of the unit holder. Number of units of each type held by each unit holder. The date on which the holder was registered. |
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What does a UCITS certificate permit the fund manager to do? |
Market the trust in any of the member states of the European Union,subject to the states marketing rules. |
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What does an equalisation payment represent? |
An equalisation payment will usually be included in the first distribution to a unit holder and represents a particular refund of the original capital invested.it is not subject to the income tax and is instead treated as deduction from book costs for CGT purposes. |
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What is an investment trust? |
A collective investment that pools the money of many investors,spreading it across a diversified portfolio of stocks and shares that are selected and managed by professional investment managers. Investment trusts issue a fixed number of shares and are regulated by company law,and their shares are traded on the London stock exchange. |
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List the principles laid down by the FCA for a company seeking a listing as an investment trust. |
The investment managers must have adequate experience. There must be an adequate spread of investment risk. The company must not control,or seek to control,or be actively involved in the management of the companies in which it invests. The trust must not,to a significant extent,be a dealer in the investments. The trust must have a board that can act independently of its management. |
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Name the the two types of investment trusts? |
Conventional Split |
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What does the redemption yield measure? |
The redemption yield measures the capital and income return on a particular share until wind up,expressed as an annual percentage. |
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What are the main characteristics of zero divided preference shares? |
Zeros have fixed redemption dates,typically no more than 10 years,they pay no income and have preferential rights over the distribution of capital. They are issued at an initial value which rises at a pre - determined compound annual growth rate until it reaches the final redemption value. |
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What is financial gearing? |
Financial gearing is when investment trust managers borrow money to take advantage of a good investment opportunity they would not otherwise be able to take due to a lack of free capital. |
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Summarise the tax position of the investment trusts and investment trust dividends? |
Investors are liable to CGTon their profits if selling investments trust shares for more than they paid for them. |
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Explain briefly what you understand by the term market value reduction (MVR) |
The MVR is applied to unitised with-profit funds and was previously known as the market value adjustment factor. Life offices usually reserve the right to reduce the amount paid on surrender of a policy during times of adverse market conditions and do this by applying the MVR. It does not usually apply on death or maturity,it's aim is to prevent the value of assets leaving the fund exceeding the value of the underlying assets. |
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Which bonds separate income and capital so that income paid reflects the income generated by the fund,leaving the capital intact? For which type of investor are they are a suitable investment? |
Distribution bonds - suitable for cautious investors requiring income. |
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State the various with profits savings plans which are currently in force. |
Conventional with profits endowment. Low-cost endowment savings plan. A unitised with-profit fund of a unit linked contract. |
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What are the main types of life assurances policies for the investment of lump sums? |
Guaranteed income bonds. High income bonds. Guaranteed growth bonds. Unit-linked bonds. Distribution bonds. Guaranteed/protected equity funds. With-profits bonds. |
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What are the chargeable events for non-qualifying policies? |
Death of the life assured. Maturity. Surrender or final encashment of a policy. Certain part surrenders. Assignment for money or money's worth. |
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What is aim of a REIT? |
To provide,for the private investor,a liquid market in property investment through a widely accessible savings and investment vechicle which had a tax treatment that is closely aligned to the tax arrangements in place for direct investment in property. |
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Explain briefly what you understand by the term market value reduction (MVR) |
The MVR is applied to unitised with profit funds and was previously known as the market value adjustment factor. |
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Describe the tax position of an investor receiving income from a REIT? |
A payment from the tax-exempt element. For individual investors this is treated as UK property income,and will be paid net of basic tax (20%). Non-tax payers can reclaim the tax deducted. ISA investors receive payments gross. Higher rate and additional taxpayers will pay extra.
A dividend payment from the non-exempt element will be treated in the same way as any other UK dividend, it is paid with a non reclaimable 10% tax credit. Whether they owe any further tax depends on the investors individual tax position. |
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Explain how CGT re-investment relief operates for an enterprise investment scheme. |
Re-investment must take place in the period beginning one year before and ending three years after the disposal giving rise to the gain:
The deferred gain is brought into charge when EIS shares are disposed of, unless a further qualifying reinvestment is made.
The CGT rate applied to a deferred gain will be the rate at the time the deferral ends and the gain becomes liable to tax.
Gains arising on the disposal of EIS investments that qualified for income tax relief are exempt from CGT as long as the shares have been held for three years.
Losses on EIS investments are allowable when either income tax relief or CGT deferral relief has been given. A loss can be set against either chargeable gains or income. |
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Who is eligible for a junior ISA? |
All UK resident children aged under 18 who do not have a child trust fund. |
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Who is eligible for a junior ISA? |
All UK resident children aged under 18 who do not have a child trust fund. |
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What happens to a junior ISA when the child reaches age 18? |
At the age 18 it will become a normal ISA and funds accessible to the child. |
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Who is eligible for a junior ISA? |
All UK resident children aged under 18 who do not have a child trust fund. |
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What happens to a junior ISA when the child reaches age 18? |
At the age 18 it will become a normal ISA and funds accessible to the child. |
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If a UK equity fund manager believes that there is going to be a sharp downturn in the market in the short term and wants to protect the value of her fund,apart from selling part of the portfolio what can she do? |
Sell FTSE 100 futures or buy a FTSE 100 put option. |
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What are the four broad categories of hedge fund strategy? |
Long/short funds.
Relative value funds.
Event driven funds.
Trading strategies.
Tactical trading funds. |
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Why is 3-monthly volatility a relatively unimportant measure of risk for investment strategies with a 20 year time horizon? |
The longer an investor can hold onto volatile investments such as shares or property,the greater is the likelihood that they can ride out cyclical or other short-term downturns. |
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Why is 3-monthly volatility a relatively unimportant measure of risk for investment strategies with a 20 year time horizon? |
The longer an investor can hold onto volatile investments such as shares or property,the greater is the likelihood that they can ride out cyclical or other short-term downturns. |
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Why is it a good idea for investors to keep some of their investment portfolio in a liquid, easily accessible form? |
Client may have unexpected needs for cash,which could result in serious capital loss if market prices are low.
It enables clients to take opportunities for adding to holdings at times of distress or panic selling. |
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Why is 3-monthly volatility a relatively unimportant measure of risk for investment strategies with a 20 year time horizon? |
The longer an investor can hold onto volatile investments such as shares or property,the greater is the likelihood that they can ride out cyclical or other short-term downturns. |
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Why is it a good idea for investors to keep some of their investment portfolio in a liquid, easily accessible form? |
Client may have unexpected needs for cash,which could result in serious capital loss if market prices are low.
It enables clients to take opportunities for adding to holdings at times of distress or panic selling. |
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If a client is saving for retirement in 15 years time, explain why they are more likely to have a higher proportion of their portfolio in equities than in short term gilts? |
This is a relatively long time horizon and there is no mention of liquidity requirements,so it is likely that a client is willing to tolerate a medium to high level of risk in the portfolio. |
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If an investor borrows money to invest in equities in an investment portfolio,what is likely to happen to the size of any gains or losses? |
The profits or losses will be increased in proportion to the gearing ratio:for example,a gearing level of 20% will result in a 20% increase to profits or losses. |
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How can advisers apply asset allocation without the use of probabilistic statistical techniques? |
By using the long-run historic average returns and volatility data for the major asset classes as the basis of constructing portfolios. |
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How can advisers apply asset allocation without the use of probabilistic statistical techniques? |
By using the long-run historic average returns and volatility data for the major asset classes as the basis of constructing portfolios. |
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Why might a portfolio lying on the efficient frontier deliver less than optimal performance over the next five years? |
Actual return and volatility over the investment period do not correspond to those assumed in the portfolio modelling process. |
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How can advisers apply asset allocation without the use of probabilistic statistical techniques? |
By using the long-run historic average returns and volatility data for the major asset classes as the basis of constructing portfolios. |
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Why might a portfolio lying on the efficient frontier deliver less than optimal performance over the next five years? |
Actual return and volatility over the investment period do not correspond to those assumed in the portfolio modelling process. |
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Between which pair of asset classes would you normally expect the highest degree of correlation over any three year period.
A- cash & equities. B- gilts & equities. C- cash & gilts. |
Cash & Gilts. |
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Which investment style is most commonly adopted by managers of UK equity income funds? |
Value investing. |
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Which investment style is most commonly adopted by managers of UK equity income funds? |
Value investing. |
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For what reasons might an advisor decide not to use closed-end funds in a portfolio with a cautious risk profile? |
Closed-end funds are more volatile because of their gearing and the variations in the discount premium to NAV |
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What is the purpose of MWR and TWR? |
MWR is used to calculate a valid rate of return for a portfolio,while TWR is used to compare performances of portfolio as calculation is not distorted by new investment influxes and cash flows. |
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What is the purpose of MWR and TWR? |
MWR is used to calculate a valid rate of return for a portfolio,while TWR is used to compare performances of portfolio as calculation is not distorted by new investment influxes and cash flows. |
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What does the sharpe ratio measure? |
The sharpe ratio measures the return above the risk free rate for every unit of risk taken as measured by standard deviation). It identifies whether the return on a portfolio is due to the skilful decisions of the manager or the result of taking excessive risk. |
