R02 Flashcards

Question

Fixed Interest Securities What is their nominal value? How are they taxed?

Answer 1

£100 Income tax, no capital gains tax unless sold on stock market

Answer 2

* Issuer's name * Coupon - amount of interest you receive * Maturity date

Answer 3

Mid/ clean price - price paid if no adjustments are made for interest due Seller gets lower mid price and buyer receives lower mid price

Answer 4

Accrued daily and paid half yearly when buying and selling who gets the interest - agreement needs to be made

Answer 5

Gilts - Government Invested Long Term Security No but low risk

Answer 6

Classified by term until redemption Shorts = \< 5 years Medium = 5 - 15 years Longs = \> 15 years

Answer 7

Interest payment and redemption price adjusted with RPI Coupon normally lower Before Sep-05: RPI from 8 months prior ro coupon date After Sep-05: RPI from 3 months Indexation lay

Answer 8

Improve liquidity of gilt market - traders can use gilts as securities for transactions Used by the Bank of England to influence interest rates

Answer 9

Sale and Repurchase Agreement Market

Answer 10

Usually 2 weeks but range from overnight to several months

Answer 11

Separate Trading of Registered Interest and Principal Securities Separates Gilts into interest (coupon) and redemption payments. E.G. 20 strips of coupon 1/2 yearly for 10 year gilt - 1 strip for redemption payment Zero coupon instruments - pay no regular interest

Answer 12

Sensitivity determines how an investment changes with fluctuations in outside factors Bonds - changes in interest rates and inflation

Answer 13

A bond's duration reflects changes in the bond's price for each 1% fluctuation of the interest rate. For example, a bond with a duration of 4 means the bond price decreases/increases 4% for every 1% increase/decrease in interest rate. A bond with a long maturity and low coupon has a longer duration and therefore is more sensitive to rate fluctuations

Answer 14

The higher the volatility: - as a higher coupon leads to a higher return in short run - as bond holder receives a return sooner

Answer 15

Unsecured loan stock - can convert bond into ordinary shares

Answer 16

* Coupon - Interest paid in usual way but lower coupon * Conversion rights vary - either time period for conversion / specific date * CGT - not exempt

Answer 17

Turns into conventional bond Normally with issuers share price i.e. higher share price - higher bond price

Answer 18

Floating Rate Notes Securities issued by companies where interest rate linked to a money market rate e.g. LIBOR

Answer 19

1/2 yearly / quarterly

Answer 20

Normally close to nominal value Change in interest rate - security itself will change But likely to alter with change in credit worthiness of company

Answer 21

Perpetual Subordinated Bond A PIBS but issued by Bank not a Building Society

Answer 22

Permanent Interest Bearing Share - high yielding Fixed Interest issued by Building Societies

Answer 23

* Fixed rate of interest * Building Society do not have to redeem them * Interest is taxable, paid gross, twice yearly * Free of CGT

Answer 24

Company offers shareholders the choice of receiving new shares instead of a cash dividend

Answer 25

Looks at income Income yield, running yield, flat yield

Answer 26

Annual coupon /clean price x 100

Answer 27

Measure of the rate of return offered by an investment up until the date it matures i.e. overall return

Answer 28

Interest yield + Gain or loss to maturity divided by number of years to maturity / clean price x 100

Answer 29

Individual's tax position - most investors target bonds for income rather than overall return To calculate overall return - tax, need to calculate net redemption yield

Answer 30

Full 6 months interest received If sold purchaser must compensate buyer for interest occured but not received

Answer 31

Interest payments usually made 7 working days before payment date Price for buyer lower than this

Answer 32

Clean price +/- interest adjustment

Answer 33

* Income need/want * Credit rating of issuers * Future interest rates trends * Changes to inflation * Government finances conduct * International and soci-political tensions * Attraction of other assets

Answer 34

* Normal - greater return in exchange for greater risk as greater exposure to risk * Flat - stable economy * Inversion - Expectation of increasing interest rates followed by falling interest rates

Answer 35

Riskier than gilts as greater chance of default, more volatile Bid Offer spread is greater Yields are higher than gilts

Answer 36

Secured - charge is taken over firm's assets and in the event of default assets used to pay loan Unsecured - rank alongside normal creditors, higher yield

Answer 37

Established by trust deed Secured by _fixed_ (secured to fixed asset of company, therefore sale of asset is restricted) or _floating_ charge (general charge over companies assets)

Answer 38

* Must be listed on stock exchange * 25% minimum for sale

Answer 39

* Main market listing is expensive * Many rules UK Listing Authority (UKLA)

Answer 40

* Confer an ownership stake in a company * Represent the risk capital, are the last to be paid out in the event of liquidation * Holders have a right to share in the profits of the company (through dividend payments), a right to attend and vote at company meetings

Answer 41

Profit held back to increase the value of the company therefore increase value of shares - capital growth for investors

Answer 42

Non-voting ordinary shares Deferred ordinary shares - don't receive a dividend until pre-determined level reached/ specific period

Answer 43

Fixed annual dividend - every 6 months and only paid if profit made Typically no voting rights unless company falls behind on dividend payments Paid before dividends to other stakeholders

Answer 44

* Equity capital risk * Market risk * Share dividend volatility * Liquidity * Currency * Counterparty risk * Regulatory * Fund managers and insurance companies

Answer 45

* Cumulative - any missed dividend made up in future years * Non-cumulative - any missed dividend doesn't need to be made up * Participating - fixed rate dividend paid and participate in ordinary share dividend as well * Redeemable - temporary source of finance, dividends paid until company repurchases shares

Answer 46

Payable when paper transaction of shares 0.5% of value of share (rounded up to nearest £5)

Answer 47

The purchaser

Answer 48

* AIM * UK domicilied ETFs * If \< £1,000 * Gilts/ corporate bonds * OEICS/ unit trusts

Answer 49

Paid on paperless transactions of shares on CREST Rounded to the nearest penny Paid by the stockbroker on behalf of the purchaser

Answer 50

Stamp duty and stamp duty reserve tax can be deducted

Answer 51

* Listed shares * Investment trusts * REITS

Answer 52

* Economic * Polictical * Investor sentiment * Profit expectations * Dividend expectations * Takeover activity * Quality and track record of management

Answer 53

Acquiring shares/ stake in a company not traded on stock exchange ## Footnote * Venture capital * Management buy-outs/ buy-ins

Answer 54

* Selling shares back to management * Selling shares to another investor * Trade sale - company-company * Floated on stock exchange

Answer 55

* Funds - typically hold shares for 3-7 years, aim to return original investors money and any additional returns. Have the potential for high returns but high risk * Listed private equity companies - invest directly into unlisted companies. Invest in funds that invest in unlisted companies * EIS, SEIS & VCTs

Answer 56

Profit after tax LESS preference dividends DIVIDED BY Number of ordinary shares in issue

Answer 57

* Shows trend in company's profitability * Widely used in company performance analysis - usually only compare companies rather than sectors * All companies list EPS * Result shows amount per share in pence that the company has earned during the year

Answer 58

Net dividend per share DIVIDED BY Current share price MULTIPLE BY 100

Answer 59

Shows true value of share's dividend Same as interest yield on bonds Not necessarily a reliable indicator as dividend and share price fluctuate

Answer 60

Earnings per share DIVIDED BY Dividend per share

Answer 61

Profit attributed to ordinary shares DIVIDED BY Dividend paid to ordinary shareholders

Answer 62

How many times the dividend could be paid out of available current earnings If figure is really high this shows profits being maintained rather than shared

Answer 63

If company draws on reserves to pay dividend

Answer 64

Current share price DIVIDED BY Earnings per share

Answer 65

Better as more shares in demand A comparison between companies in same sector

Answer 66

Total capital employed LESS Claims + loans + preference shares

Answer 67

Amount available to shareholders if the company were to close down, sell all its assets and distribute balance. Value of tangible assets attributable to ordinary shares

Answer 68

Takeover bid and liquidation - compare bid price to NAV

Answer 69

* Differing accounting policies can be used to calculate profits so difficult to compare * Management can change accounting period * Ratios use historical data therefore no guide to future performance

Answer 70

Changing economic circumstances and desire to move

Answer 71

Buying a property with the express priority of letting it out for income or selling it at a profit

Answer 72

* Liquidity risk - initial cost * Management risks - need to run property, agency fees * Void risk - if property is vacant and no rent

Answer 73

* Location * Tenants * Age and condition of property * Diversification - buying more property

Answer 74

Yearly rental income DIVIDED BY Purchase price of home MULTIPLIED 100 Price should include any expenses of purchase

Answer 75

Yearly rental income LESS letting expenses DIVIDED BY Original purchase price PLUS charges MULTIPLIED 100 Net yeild is after any letting expenses

Answer 76

Individuals who purchase land Due within 14 days of effective date of transaction i.e. completion date/ date of payment

Answer 77

£0 - £150,000 = 0% £150,000 - £250,000 = 2% \> £250,000 = 5% Paid via self assessment

Answer 78

Charged at 1% on present value of rent over lease term if value \> £125,000 for residential or \> £150,000 for non-residential If you’re buying a second home, you’ll still pay Stamp Duty on a property costing more than £40,000 at the normal rates – plus surcharge of 3%

Answer 79

Annual rent MULTIPLED BY Lease term

Answer 80

If rental income is lower than £1,000 don't need to be declared to HMRC If rental icome is greater than £1,000 can deduct allowance from gross rent rather than deducting expenses

Answer 81

* Commercial property * Agricultural land * Forests * Any other land or property not used as residence * 6 or more residential properties bought in a single transaction

Answer 82

Income from renting a furnished room in your main residence up to £7,500 tax free or £3,750 per person if joint If yearly rental is greater than £7,500 can either be taxed on excess over £7,500 but no expenses or normal basis income less expenses No CGT payable as main residence

Answer 83

If yearly rental is greater than £7,500 can either be taxed on excess over £7,500 but no expenses or normal basis income less expenses

Answer 84

* Must be in UK * Doesn't apply to self contained unit or unfurnished * Must not be used as a residence i.e. an office

Answer 85

Closed ended companies listed on stock exchange

Answer 86

* 75% of assets and gross profits must be in investment property * Income must cover gearing by 125% * 90% of rental profits must be paid as dividends within 12 months of end of accounting period * Listed on recognised stock exchange * At least 3 properties and held for 3 years

Answer 87

Ring Fenced: Within Fund: Exempt from corporation tax Income: Property income paid net of 20%, can reclaim if non tax-payer CGT: Fully liable Non-Ring Fenced Within Fund: Subject to corporation tax Income: Dividend income, usual dividend rules CGT: Fully liable

Answer 88

Property authorised investment fund, is an OEIC

Answer 89

* Retail - lowest yield * Office building - most competition in terms of supply * Industrial property - higher yields

Answer 90

* Move in different ways to equities - good for diversification as often invest in all 3 types * More secure income as longer leases - residential 6-12 months; commercial 10 years * Valuation - multiple of rent * Values cyclical - rent paid every 3-5 years * Usually pass insurance and maintenance costs to tenant

Answer 91

Art, commodities, collectables

Answer 92

* Don't produce income * Heavily reliant on investor sentiment - need to be an expert * Often cost money to upkeep - e.g. repair, insurance premiums * Limited supply and fluctuating demand * Price between buying and selling can be higher * Authenticity important

Answer 93

Hard: typically mined e.g. oil, gold, precious stones Soft: typically grown e.g. coffee

Answer 94

Low correlation with other assets

Answer 95

* Companies that produce commodities * Funds thta invest in commodities * Exchange Traded Commodities (ETCs)

Answer 96

Digital ledger processing transactions using encryption technology Computer accounting solving math problems Confirms transaction is legit Creates new digital currencies - pays miners with % of transaction fee charged to user

Answer 97

* Transactions annoymous * Not regulated by FCA * Not backed by government or central banks

Answer 98

Shows the way markets have moved over time

Answer 99

* Compare a share with performance of sector or market * Compare performance of fund manager with market

Answer 100

* An index reflecting whole market * Largest companies/ smaller companies * Particular sectors

Answer 101

Market capitalisation ## Footnote Larger companies impact the index more

Answer 102

Free float of stock equals the portion of shares available for trading therefore weighting of company with lower than 75% shares available are adjusted for free float

Answer 103

* Can be heavily impacted by larger companies * Not as good as fundamentally weighted index - weighted on revenue, earnings, employees and dividends * Ignores dividends, costs of buying and selling, CGT and management expenses

Answer 104

Buying assets as expect prices to continue to rise - bubbles Overestimate expected returns and underestimate competitive pressures leads to excess liquidity in markets

Answer 105

Interest rates are so low Government use fiscal policy instead

Answer 106

* Interest rates and currencies * Business and competition * Economic cycles and inflation * International relations - greater inportnace due to globalisation * Elections - ease policy to increase votes

Answer 107

* People are living longer - more people at retirement, strain on, services investment markets and state pension * Birth rates are declining * Ageing population and workforce - increased strain on financial services and healthcare

Answer 108

Fast growing industries ## Footnote * Mobile communications * Mew generation of digital metrics * Increased globalisation - lead to investment in foreign markets and low skilled workers competing with developed countries

Answer 109

* Boom * Slow down - falling demand, increase interest rates and inflation and increase in unemployment * Recession - falling demand, profits and output, lower interest rates, inflation and increase in unemployment * Bust * Recovery - Increased demand, lower inflation and interest rates, equity growth increases as interest rates low * Acceleration - increase demand, inflation and interest rates

Answer 110

Total value of goods and services produced each year measured quarterly Show where company is on business cycle

Answer 111

Public Sector Net Cash Repayment

Answer 112

Difference between government spending and revenue Indicates how much the government need to borrow - higher in recession and lower in a boom

Answer 113

Base rate - rate C

Answer 114

18 months - 2 years after change therefore Bank of England targets future rather than present inflation

Answer 115

Increases asset prices for fixed interest and property

Answer 116

(BOP) is an accounting of a country's international transactions for a particular time period. Any transaction that causes money to flow into a country is a credit to its BOP account, and any transaction that causes money to flow out is a debit

Answer 117

Trade Gap M \> X

Answer 118

* Current account - deals with X, M, interest, dividends & rent - Visible trade (goods) and invisible trade (tourism) - divided into trade in goods and services, investment income and transfer payments * Capital account - foreign investments and loans in UK and abroad - If overdrawn Bank of England reserves used to finance it

Answer 119

* Narrow Money - M0 = level of notes and coins in circulation + banks operational balances at the Bank of England * Broad money - M4 = money supply is defined as a measure of notes and coins in circulation (M0) + bank accounts (deposits created by banks and BS through lending activities and savings deposits

Answer 120

Economic situation and changes in economic cycle E.G. Rising interest rates indicates lower demand for money E.G. Rising M4 indicates higher demand for loans, rapid increase may indicate rising inflation

Answer 121

Selling/ purchasing treasury bills/ gilts E.G. to lower money supply sell securities at attractive rates - money being removed from circulation

Answer 122

* RPI * CPI * CPIH - CPI and includes owner occupiers housing costs * RPIY - RPI, excludes mortgage interest payments

Answer 123

Disinflation - reduction in rate of inflation Deflation - when inflation turns negative

Answer 124

* Reduction in price of future interest * Reduction in value of equities

Answer 125

* Higher return on cash based deposits * Reduction in price of fixed interest, higher yield for new bonds which leads to increase value of £ * Reduced equities as increase in cost of borrowing * Increase foreign investors due to increased value of £

Answer 126

* Maximise returns and minimise risk * Investors are risk averse * Diversified portfolio of imperfectly correlated asset classes can reduce risk through lower volatility Imperfectly correlated asset classes

Answer 127

How far from the average expected return an investment performs

Answer 128

How widely the actual return on an investment varies around its average/ mean return

Answer 129

The return expected to fall within one standard deviation of the average return 68% of the time and within two standard deviations 95% of the time

Answer 130

Holding a range of imperfectly correlated asets in a portfolio to smooth out fluctuations caused by economic and financial events

Answer 131

Diversification Hedging - taking a position where if one asset value falls another one increases

Answer 132

Lowers systemic risk but not systemic risk

Answer 133

* Holding different asset classes * Companies in different sectors * Overseas companies

Answer 134

* Positive correlation - profits and share values move in same direction * Negative correlation - profits move in appropriate direction to values * No correlation - profits and shares have no relationship

Answer 135

* Return of each investment * Standard deviation of each assets return * Correlation between assets return

Answer 136

* Assumes investment returns follow normal distribution pattern * Standard deviation correct level of risk? * Doesn't factor in e.g. ethical preferences * Works on historial data * Doesn't take into account charges - transaction costs * Assumes underlying funds are index funds

Answer 137

Investment specific risk - risk that affects a particular company Independent of economic, social and policitical factors e.g. new competitor

Answer 138

Need 15-20 randomly selected securities - however the rate of risk diminshes the more securities are added

Answer 139

Capital Asset Pricing Model

Answer 140

To consider a riskier asset an investor would want a return that is equal to the risk-free return plus a risk premium for taking on the additional risk of that asset

Answer 141

Usual return you would get in cash / 91 day treasury bills

Answer 142

The riskiness of a security by comparing it to the market Expressed in terms of its beta ß

Answer 143

The market has a beta of one, and the beta of an individual security reflects the extent to which the security’s return moves up or down with the market

Answer 144

Has matched market historically - if market moves by 10%, the security's price will be expected to also move by 10%

Answer 145

Exaggerates market movement and is more volatile than the market - by how much depends on the ß - aggressive securities

Answer 146

Usually more stable than the market, move less than the market but in the same direction - defensive securities

Answer 147

E(Ri) = Rf + ßi (Rm – Rf) E(Ri) is the expected return on the risky investment; Rf is the rate of return on a risk-free asset; Rm is the expected return of the market portfolio; ßi is the measure of sensitivity of the investment to movements in the overall market; (Rm – Rf) is the market risk premium, the excess return of the market over the risk-free rate; and ßi (Rm – Rf) is the risk premium of the risky investment

Answer 148

* All investors have an identical holding period * Many buyers and sellers * No taxes / short selling restrictions * All info available * Liquidity ignored - quantity of risky securities fixed in market * Investors can borrow at risk free rates and make decisions based on risks and return alone

Answer 149

* Finding risk free rate difficult * Choosing market portfolio can be difficult as ß varies - typically uses FTSE 100 * ß assured to be stable and calculated on historical data

Answer 150

Only concerned with security's sensitivity to market therefore single factor model

Answer 151

Attempts to describe security returns as a function of a limited number of factors - adds to risk premium for each sector E(Ri) = Rf + ßGDP (risk premium GDP) + ßIR (risk premium IR) = minimum return + risk premium

Answer 152

Add factors for company size and value ## Footnote * Small cap stocks tend to outperform large cap stocks * Value stocks tend to outperform growth stocks

Answer 153

A security's return can be predicted using the relationship between the security and a number of common risk factors - sensitivity to changes in factor is represented by a factor - specific ß

Answer 154

Abritrage activities should bring it back in line so not possible for a security to yeidl better returns than indicated by its sensitivity to the various factors

Answer 155

Practice of taking advantage of security mis-pricing to make a risk-free profit

Answer 156

* Belief that asset prices determined by more than one type of market risk * Each investor holds a unique portfolio rather than identical portfolios

Answer 157

* APT is general - doesn't tell us which factors are relevant * Number and nature of factors likely to change over time and between economies * Also need to calculate multiple betas

Answer 158

* Investors require extra return for taking risk * Pre-dominantly concerned with risk that can't be eliminated by diversification i.e. systemic risk

Answer 159

* Unanticipated inflation * Change in expected level of industrial production * Change in default risk premium on bonds * Unanticipated change in return of long term government bonds over treasury bills (shifts in yield curve)

Answer 160

Efficient market hypothesis ## Footnote * Share prices move based on info such as profits * Share price you see equals fairest price * Not possible to outperform market by choosing undervalued shares because market reacts before investors

Answer 161

Chance than skill

Answer 162

Tracker funds

Answer 163

Same premise but different level of info available: ## Footnote * Weak-form efficiency - curernt share price fully reflects all past price and trading info * Semi-strong efficiency - share prices adjust to all publicly available info, done rapidly and unbiased (all past-trading info, accounts and other economic factors) * Strong-form efficiency - share price reflects all public and private info, including insider trading

Answer 164

Aims to explain market anomalies not explained by traditional finance models

Answer 165

Psychological factors, behavioural biases affect investors therefore investors are irrational - as shown by bubbles and crashes Differ from MPT and EMH that say investors are rational

Answer 166

* Investors more distressed by a loss than they are pleased by the same level of gain * People play safe when protecting gains but often take riskier decisions aimed at loss aversion e.g. reluctance to realise a loss therefore hold onto a losing investment for too long hoping it will make a gain - avoiding feeling of regret

Answer 167

* Investors overestimate their own skills and predictions - leads to bubbles and underestimate the likelihood of bad outcomes * More optimistic when market goes up and more pessimistic when markets go down * Often give too much weight to recent experience which often run contrary to long-run averages

Answer 168

* Can't predict the effect on the market of human behaviour * No doubt this impacts investors but hard to/ cannot be quantified * Only look at anomalies which will eventually be priced out of the market

Answer 169

* Money received now is more valuable than money received in future years * A rate of interest received monthly is more valuable than the same rate of interest received quarterly/ annually

Answer 170

Present value (PV) - amount of capital invested today, known as principal

Answer 171

Time period (n) - time period capital is invested - The number of time periods interest is paid denoted by n, e.g. if paid twice a year, n = 2, quarterly, n = 4

Answer 172

Interest rate (r) -quoted as a %, expressed as a decimal, r. e.g. interest rate of 7% is written r = 7 ÷ 100 = 0.07

Answer 173

Future value (FV) - accumulated value of an amount of money invested for n time periods, at a rate of interest r

Answer 174

The basic formula for calculating compound interest is: FV = PV (1 + r)n

Answer 175

Effective Annual Rate - takes into account the interest rate if compounded more than once a year (1 + r/n) n - 1

Answer 176

No difference in formula EAR used for loans and deposits APR (annual percentage rate) used for loans AER (annual equivalent rate) used for deposits

Answer 177

n increased by number of times compounded e.g. 12 for monthly in 1-year or 24 for monthly in 2-years r is decreased by n

Answer 178

PV = FV/ (1 + r) n annual interest = number of times compounded in year

Answer 179

FV = P ((1 + r)n - 1 / r)

Answer 180

Calculate PV of an investment's future cash flow to arrive at a fair value for current price Calculating PV of FI PV = FV/ (1 + r) n where PV is present value of cash flow

Answer 181

PV = £6.50/(1+ 0.05)1 + £106.50/ (1+ 0.05)2 PV = £6.19 + £96.60 Therefore, the theoretical present value of the bond = £102.79.

Answer 182

The sum of money needed now to make regular payments and interest over fixed term at fixed interest rate

Answer 183

A = P (1 - (1 + r) - n / r

Answer 184

The real return is approximately the nominal return from an investment minus the inflation rate: RREAL = RNOM – RINF where: RREAL is the real return; RNOM is the nominal return; RINF is the inflation rate.

Answer 185

* Cash deposits * Fixed interest

Answer 186

* expanding money supply * bottlenecks in production cause prices to rise and imports to flood into the economy * the government and the financial markets respond with rising interest rates * cuts in public expenditure, as well as tax increases to dampen down demand * the economy enters recession and prices steady, or perhaps fall, as the supply of goods and services exceeds economic demand. * Some cycles are further exacerbated by external events such as: * war or shortages; * prices of imported goods rising as overseas countries experience inflation and commodity prices also increase * currency devaluation * high wage demands, which can be affected by trade union policies * Investor sentiment

Answer 187

Fixed interest securities - sensitive to the rises and falls in interest rates. When Interest rates fall, bond holders capital value will rise and when interest rates rise, capital value will fall, as investors can get greater returns elsewhere

Answer 188

By holding shorter dated stock / cash

Answer 189

* Economic cycle * Fiscal policy - issuing gilts will push up long term yields * Monetary policy - QE reduces short term rates * Inflation - expectations * Preference for liquid securities - in uncertain times prefer instant access

Answer 190

Bonds and cash deposits

Answer 191

* Default risk * Downgrade risk - credit rating lowered * Credit spread risk - gap between yields of gilts and corporate bonds get wider due to lack of confidence in corporate bonds - concern they can't service their debt * Counterparty risk - a counterparty will not pay what it is obliged to

Answer 192

Investment made overseas / in a foreign company profits impacted by change in exchange rates

Answer 193

Property and private equity vulnerable and may have to sell assets at a discounted price

Answer 194

E.G. Natural disasters

Answer 195

Changes in government / unrest

Answer 196

Internal errors in company e.g. reporting error, fraud, regulatory risk, systems failure

Answer 197

Where financial assistance comes from existing capital base e.g. the institution’s shareholders, bondholders and depositors

Answer 198

* Reduces the risk of one investment * Spreads the opportunity for potential return across asset classes * Minimises risk of the overall portfolio suffering downturn * Increases possibility of stable returns through all economic cycles

Answer 199

Borrowing money in a client's portfolio with objective of increasing exposure to other assets Magnifies positive and negative portfolio returns Remember - borrowing costs

Answer 200

* Invest small sums of money, because the investor’s cash can be ‘pooled’ into a much larger fund * Professional fund managers make the underlying investment decisions * Investor can achieve a balanced portfolio with spread of investments * Offer the ability to pursue particular objectives or specialise * Investor’s risk is reduced by the wide spread of investments in the underlying portfolio * Lower dealing costs

Answer 201

Must equal NAV - Net Asset value - total value of assets held

Answer 202

* Investor participate in a large portfolio of shares * Units or shares, each unit representing a small but equal fraction of a portfolio of perhaps 50 or 100 different shareholdings * Assets of a unit trust are held for investors by trustees, invested by managers, whereas the assets of an OEIC are held by an independent depositary * Initial charge, which covers setting up costs and also an annual management fee. If no initial charge, an exit charge may be applied

Answer 203

OEIC: independent depository therefore protected by company law and depository UT: protected by trust deed and trustees Both: protected by FCA and FSCS

Answer 204

* Capital protected * Income * Growth * Specialist * Targeting an outcome

Answer 205

Must have at least 80% or more of its assets invested in the relevant sector Income fund must achieve a yield of not less than 90% of the relevant index Performance measurement companies such as Lipper or S&P

Answer 206

Signing a trust deed

Answer 207

* Large banks / insurers * Must be independent of management group

Answer 208

* Must report issues if unhappy with how fund managed * Audit fund * Issuing info to unit holders who must be registered * Arrange meetings of unit holders * Distribute income

Answer 209

* Name and address of unit holder * Number of units held * Date unit holder registered Can be closed mo more than 30-days per year

Answer 210

To manage fund in return for AMC

Answer 211

* Authorised person * Adequate financial resources * Manage assets according to regulations, the trust deed and scheme particulars * Supply information to the trustee * Maintain a record of units for inspection by the trustee * Notify the trustee and/or the FCA if breach in rules

Answer 212

Do not pay tax on capital gains nor income or gains derived from options or futures Corporation tax - allowable expenses

Answer 213

* Interest and rental income are subject to corporation tax at a special rate of 20%. * Dividends are received as franked investment income and flow through to dividend distributions payable by the unit trust with no tax liability. * Foreign dividends may have had tax deducted at source (withholding tax), which may not be reclaimable. * Funds that distribute interest rather than dividends can deduct the interest as an expense for corporation tax purposes to ensure there is no double taxation

Answer 214

Investment companies with variable capital (ICVCs) Incorporated and authorised

Answer 215

ACD - Authorised Corporate Director

Answer 216

* OEIC compliance and protection * Preparation of accounts * Register of shareholders * Day to day management

Answer 217

* Valuation, pricing and dealing * Keeping ACD in check * Collection of income * Safekeeping assets

Answer 218

Both open-ended ## Footnote * If multiple people want to sell may have to sell positions * If fund grows too much and can't cope

Answer 219

* OEIC - limited company and issues shares, has one constitutional document and holds AGM - annual audited accounts, cost of creation may be met by fund * Unit Trust - Trust structure and issues units - must be approved by meeting of unit holders. If it wants to increase charges must give 60 days notice

Answer 220

* Both accept minimum and maximum * Both accept single and regular

Answer 221

Dilution levy - levy if large investor makes money and then leaves - ensures charging is fair for all

Answer 222

When a unit is bought it includes income accrued from previous distribution up to date of purchase

Answer 223

Income accrued from date of purchase plus equalisation payment

Answer 224

Represents a partial refund of capital invested so no income tax but deducted from purchase price to identify acquistion cost for CGT

Answer 225

* Fairness between unit holders * Allow same price per unit dividend payment to all unitholders

Answer 226

First £2,000 of dividend income in 2020/21 is tax free. Sums above that will be taxed at the following rates: 7. 5% for basic-rate taxpayers; 32. 5% for higher-rate taxpayers; and 38. 1% for additional-rate taxpayers. Taxpayers must use self-assessment to pay any tax due

Answer 227

Trustee is liable to tax at 38.1% £2,000 tax-free dividend allowance does not apply, although dividends that fall within the standard band of £1,000 will only be taxed at 7.5%

Answer 228

* Paid gross * Under PSA, BRT can earn £1,000 in savings income tax free, HRT £500, additional rate no allowance

Answer 229

* Income tax at 45% * First £1,000 (standard rate band) taxed at 20%

Answer 230

Still counts as income for the investor, so same tax treatment as dividend that is distributed

Answer 231

* Capital gains may be payable on any profits on disposal * Losses can be offset * Annual exemption

Answer 232

A switch from one sub fund to another is a disposal for CGT FOF exempt

Answer 233

* OEICs more EU friendly for operating and marketing in EEA * More flexible charging structure as can invest in multiple share classes * Easier to run under umbrella structure e.g. platform * Easier to create new funds - wider fund choice

Answer 234

* Fund of Funds (FOF) * Manager of Manager (MOM)

Answer 235

Fettered funds - only uses funds of host provider - correlation and diversification considered Unfettered funds - can use funds from other companies - additional expense of charges of underlying fund

Answer 236

Provides a CGT shelter, because switching between funds by the manager does not create any CGT liability

Answer 237

* Overall manager appointed to source best fund manager in each sector * Rather than selling assets can just be assigned to new manager * Cost transparency is greater for MOM than FOF

Answer 238

* UCITS funds * S.270 designated territories funds * S.272 non-designated territories funds

Answer 239

Receive automatic recognition from FCA as authorised by EU

Answer 240

Protection equivalent to FCA as satisified country has similar rules to UK

Answer 241

Not recognised by FCA and marketing prohibited in UK

Answer 242

* Dividends and interest same as UK and normal CGT rules * Dividends from funds constituted as companies is taxed as foreign dividend * Must be declared to HMRC * UK investor willl be taxed on their share ofthe income even if distribution is not received * If fund has \> 60% of interest bearing assets, distribution will be treated as interest and taxed at 0%, 20% 40% or 45%

Answer 243

* Often accumulative funds therefore no dividend or income (if equities dividends have to pay withholding tax * CGT on CGT principles BUT chargeable as income tax therefoe higher rates * No allowances

Answer 244

* Grow faster as low tax environment * If non-UK domicile - no IHT

Answer 245

* If equity - dividends subject to non-reclaimable withholding tax * If fixed interest - tax free income as income is paid gross * May be small amount of tax e.g. Jersey funds are subject to small flat annual corporation tax charge

Answer 246

Tax-elected fund (TEF) ## Footnote * Required to make a dividend and non-dividend (interest payment) * Moves point of tax from TEF to investor

Answer 247

Investors can exchange shareholdings on stock exchange for units/shares in fund

Answer 248

Cheaper for disposing of small shareholdings

Answer 249

* Either accepts shares and adds into fund or * Disposes of shares and buys new units

Answer 250

£1,000 No investor CGT exemptions

Answer 251

* Dual pricing * Single pricing

Answer 252

Determines: The highest price at which units can be sold to investors (offer) The lowest price a manager can repurchase from investors (bid) Difference = bid-offer spread

Answer 253

Uses mid market pricing therefore incoming and outcoming investors deal at same price

Answer 254

Total net value of fund's assets

Answer 255

Dealing costs and charges are shown separately

Answer 256

Single price and initial charge

Answer 257

* market buying value of underlying securities; * add costs of buying securities in the market; * add on all the other property of the trust, such as uninvested cash and any accrued income less tax, fees, charges and expenses; * divide the total by the number of units issued; * add on the initial charge and express the price to four significant figures

Answer 258

* value underlying securities at the best market selling prices; * deduct the dealing costs that would be incurred if the securities were to be sold; * add in any uninvested cash; * add any accrued income after deduction of any annual management fees, trustees’ fees, audit fees and outstanding tax; * divide the total by the number of units in issue; * express to four significant figures

Answer 259

Difference between buying and selling prices, expressed as a % of the buying price

Answer 260

* Dealing costs * Initial costs

Answer 261

* Type of asset * How easy it is to buy or sell * How liquid the asset is

Answer 262

* 5% to 7% * \>1% * \>10% * Often no spread at all

Answer 263

Manager sets buying price at offer end

Answer 264

Manager sets buying price at bid end

Answer 265

Manager holds new units or units that have been repurchased from investors

Answer 266

Stock control mechanism applied by managers in buying and selling of units

Answer 267

* Fund is expanding as investors are buying, the manager will create units at the creation price * Fund is contracting, there are more sellers than buyers, the manager will cancel units at the cancellation price * Weighing up the risk of the market turning and expected future demand

Answer 268

Forward - price calculated at next valuation Historic - price calculated at last valuation

Answer 269

If value has changed by 2% or more since last valuation, and if the investor requests it

Answer 270

Forward basis

Answer 271

FCA detailed framework for authorisation and operations of collective investment schemes

Answer 272

* Initial charge * Annual management fees * Performance fees * Exit charges * Other charges - e.g. legal and audit fees

Answer 273

Companies Acts ## Footnote * FCA - FSMA 2000 * HMRC - s.842 approval - Income and Corporation Taxes Act 1988

Answer 274

* Any kind of company, whether its shares are quoted, unquoted, private company * Provide venture capital to new firms or firms that want to expand * Any country in the world

Answer 275

Extremely adventurous investors

Answer 276

PLCs on LSE

Answer 277

* Structured as a normal company with directors and shareholders * Issue a fixed number of shares (close-ended) * Regulated by company law * As PLCs they can borriw to 'gear up' * Shares are traded on LSE

Answer 278

* Salaried fund manager - self managed trust * Contract a external fund mangement group

Answer 279

Dual-pricing known as market makers spread or turn

Answer 280

* Managers can take a longer term view * Not forced to sell assets to pay investors as secondary market * Can gear portfolios

Answer 281

* Resident in the UK * Listed on the LSE * Doesn't retain \>15% of gross income

Answer 282

If share price is higher than the NAV per share, then the IT is trading at a premium e.g. If share price is 210p, NAV is 200p, the premium is 5% Occurs when high demand for IT

Answer 283

Share price is lower than NAV per share - trading at a discount, as buying underlying assets at lower price than if bought directly e.g. Share price is 180p, NAV is 200p, the discount is 10%. Occurs when more sellers than buyers

Answer 284

Provides better returns on share price than underlying assets

Answer 285

They reduce the gain an investor could potentially receive If stock market falls as well, investor loses \> reduction in value of a trusts investments

Answer 286

Total value of all the investments held less any liabilities

Answer 287

* total value of a trust’s listed investments at mid-market prices; * plus unlisted investments as valued by the directors; * plus cash and any other assets; * less nominal value of loans, debenture stock and preference shares * resulting figure is known as shareholders’ funds

Answer 288

* Many ITs issue warrants or loan stocks with option to convert to ordinary shares * Diluted NAV - assumes all options are exercised

Answer 289

* Conventional * Split capital

Answer 290

Issue one main class of equity share (ordinary share) - investors entitled to all income and capital, indefinite term

Answer 291

* Fixed initial term * On maturity investors vote whether to wind up trust or contine - typical term is 3 years * Closer to date the narrower the discount as investors can obtain full value of assets if wound up

Answer 292

Helps to reduce the discount

Answer 293

* One portfolio of investments produces both growth and income * Issue multiple classes of equity shares with different priorities on wind up * Limited life span 5-10 years * Investors are not locked in

Answer 294

* Redemption yields - told return on maturity * Hurdle rate - rate the investment must grow in order to replay each class of share at the wind up date * Wipe out rate - annual rate of decrease in gross assets - no capital payment on wind up

Answer 295

Way of measuring the company’s ability to meet or cover, from current assets, the liability to share classes with a pre-determined redemption price

Answer 296

Any shares ranking for prior payment

Answer 297

Assets exactly cover the redemption price. A cover of 50% or 0.5 means that half of the redemption price is covered

Answer 298

* Ordinary shares - entitled to all income and growth * Preference shares - fixed dividend, * Split capital shares - income shares, capital shares, packaged units, zero dividend preference shares

Answer 299

* Right to buy shares at a fixed price at pre-determined date or within a specified period * No income is produced * Price is a fraction of the share price * Potentially high risk and high reward * Bought and sold on LSE upto final exercise date

Answer 300

* No income tax liability - as no dividends * CGT on gain in excess of annual exemption

Answer 301

* Sweeteners - when new shares issued e.g. one warrant given for every 5 shares purchased * Newly opened ITs usually trade at a discount, immediate loss due to launch costs - so they need a sweetener

Answer 302

If warrants are exercised and more shares created, there will be a dilution in the NAV per share of existing shares

Answer 303

Repurchase their warrants to reduce the dilution effect

Answer 304

When investment trusts buy their own shares

Answer 305

* To return money to shareholders * Reduce discounts

Answer 306

Balance supply and demand and help reduce the discount

Answer 307

Shareholders

Answer 308

Total gross assets DIVIDED BY Net assets MULTIPLIED 100

Answer 309

No gearing

Answer 310

Fund is 20% geared (20% of the total assets are borrowed funds)

Answer 311

Fund borrows money to buy shares and other assets, if they do not have sufficient free capital

Answer 312

* Financial gearing (e.g. bank loans and debentures) * Structural gearing (in case of splits) * Investing in other geared investments e.g. warrants

Answer 313

Is inherent in the nature of split capital ITs, each share class has varying risk

Answer 314

* returns on each class of share are affected by the entitlements of other share classes that rank for prior payment; * number of share classes and their particular entitlements determine the level of structural gearing involved; * classes of shares that are lower down the order of entitlement are higher risk as a result of the capital structure

Answer 315

* an investment trust uses gearing as an investment strategy * it invests in other investment trust companies that use gearing as an investment strategy * exposure to gearing subjects value to significant fluctuations compared with the underlying investment

Answer 316

If no underlying or structural gearing and financial gearing is below 30%, investors do not need to be given enhanced risk warnings

Answer 317

Lowest on older ITs - 0.5% New, specialist ITs - 1 to 1.5%

Answer 318

+ 0.2 to 0.5% Includes all other expenses of running the fund

Answer 319

TER includes performance fees

Answer 320

* Entry or exit fees * Interest on borrowing * Brokerage charges * Dealing costs

Answer 321

* Approved by HMRC - not subject to CGT on gains * No additional tax on franked income (franked income is the dividend income that investment trusts receive from their shareholdings in UK companies) * Corporation tax payable on unfranked income, for example, interest from gilts and bank deposits. Can reduce by offsetting expenses – interest paid on borrowings and management fees

Answer 322

* First £2,000 dividend income annually is tax free. * Sums above this are taxed as any other dividend * Investors are liable to CGT on any profit - total gains on all disposals, after deduction of losses, exceeds an investor’s CGT annual exempt amount. * If held in an ISA, all dividends and capital gains are tax free

Answer 323

* Cost of purchasing shares usually lower * AMC cheaper for older contracts * Higher risk but potential higher reward - trading at discount and gearing * Can provide higher levels of income * Some ITs can't be accessed as OEICs and unit trusts e.g. guaranteed or protected funds

Answer 324

Undertakings in Collective Investment and Transferrable Securities

Answer 325

* No more than 10% in any one share * Only 4 companies can have 10% * Any other holdings must not exceed 5% * Minimum of 16 holdings

Answer 326

Hold up to 20% of the value of the fund in the shares of one company and, where justified by exceptional circumstance, up to 35%

Answer 327

* Retail can't borrow on permanent basis, but can can borrow up to 10% fund on temporary basis against future cash flows * Non-retail can borrow 10% on permanent basis

Answer 328

Unregulated Collective Investment Schemes

Answer 329

Non-mainstream pooled investments (NMPI) Qualified Investor Schems (QIS) Traded life policy investments

Answer 330

* With Profit - same as non-profit but bonuses added annually in arrears * Unitised with profit * Unit linked

Answer 331

If certain criteria is met by the policy holder eg regular premiums or lump sum paid the sum assured paid to the policy holder. Sum assured is the notional intrinsic underlying value

Answer 332

* Added to the value of the policy annually. Based on companies profits, not guaranteed but, once added, cannot be taken away. * Annual bonuses based on performance of fund, expressed as % of sum assured and calculated on a simple or compound basis. * Final bonuses paid on maturity, death, sometimes surrender. Represent fund capital growth over entire period. More volatile, directly affected by changes in markets, not guaranteed

Answer 333

Most hold higher fixed interest and lower equities Usually mean lower performance over long-term

Answer 334

Fund becomes weaker - decreases value of underlying assets

Answer 335

* Suitable for risk averse * Bonuses paid from firm's reserves * Smoothed return - makes feel safer * Attraction of terminal bonus * Final return often greater than inflation

Answer 336

* Difficult to understand * Difficult to appraise underlying investment performance * MVR can reduce liquidity * Bonus rates have decreased in recent years

Answer 337

Market Value Reduction - can reduce the amount payable on surrender Not applied on death or maturity

Answer 338

Applied so value leaving fund doesn't exceed value of underlying assets

Answer 339

With profit investment expressed as unit-linked policy. Premiums buy units in the unitised with profit fund. Unit price is guaranteed not to fall

Answer 340

* Fixed priced - unit price never varies, bonus adds units, cannot be taken away by the life office. Increase units daily by % of annual bonus set * Variable price - unit price is increased through addition of regular bonuses, guaranteed not to fall

Answer 341

* Bonus rate declared annually in advance * Easier to understand current value * Switches can be made with other unit-linked funds * Involves the insurance company in less initial commitment of reserves than traditional with profits * Final bonus usually paid on death or maturity

Answer 342

By number of units allocated

Answer 343

Lower than the premium paid due to initial charge, usually 5%, and early termination charge

Answer 344

* Fund performance * Exact days which the policy is set up and cashed in

Answer 345

* Unique types of product available * Some regulated products * Property fund with actual property not property shares * Favourable tax treatments * Funds switched without cost or tax consequences

Answer 346

* Term must be at least ten years * Premiums must be payable annually or more frequently for at least ten years (or until a claim on death or disability) * Minimum level of life cover is 75% of the total premiums payable * Premiums payable in any one year must not be more than double those payable in any other year * No premium is to be more than one-eighth of the total premiums payable over the term of the policy * Annual limit for premiums is £3,600

Answer 347

D.A.M.P.S ## Footnote * Death of life assured * Assignment for money or money's worth * Maturity * Part surrenders * Surrender or final encashment

Answer 348

Maturity Value + partial surrender in 5% rule MINUS Premiums paid + premiums chargeable gains

Answer 349

S.P N.Q WOL N.R ## Footnote * Single premium * Non-qualifying * Whole of life policy * Nominal life cover usually 101% of value of the units * Regular withdrawals are return of capital rather than income

Answer 350

* Can switch fund with no CGT * For higher rate tax payer lower tax * Can withdraw 5% annually

Answer 351

* Not tax free but deferred * Paid on income tax rather than CGT so can't use annual exemption amount * If investor's tax rates likely to increase * Any chargeable gain could remove MCA/ child benefit

Answer 352

* Guaranteed income bonds * High income bonds * Guaranteed growth bonds * Distribution bonds * Guaranteed protectd equity bonds * With profit bonds * Unit-linked bonds

Answer 353

Guaranteed income each year for specified term (payable in arrears, up to 5 years). On maturity capital is returned Good for BRT as no additional tax

Answer 354

Based on package of derivatives - ## Footnote * Offer a high level of income, e.g. 10%, for five years, but do not guarantee return of capital * Return of capital depends on performance of one stock market index, or average of two or three. * Provided the index meets a pre-set performance target, capital is returned in full. If less maturity will be less than original investment

Answer 355

Similar to guaranteed income bond but pay no income, free of CGT, usually invested in gilts

Answer 356

Liability to basic rate income tax is covered by tax paid within the fund, take 5% tax deferred withdrawals each year for 20 years or until the original capital has been returned Good for higher rate tax payers

Answer 357

Distinguishes between capital and income. Income paid = income generated

Answer 358

Guaranteed return of capital plus % of growth of index to which it is linked. Guarantee generally operates on a fixed date

Answer 359

Quarterly guaranteed level of protection between 95-100% of capital - protected against this level of fall in market - if 95% can still lose 20% a year

Answer 360

* Variety of funds available to meet requirements of trust * No taxable income generated therefore less admin and expenses * Life fund pays less corporation tax than if trustees paid on income generated * Policies can be assigned to beneficiary with no tax charge on transfer * Up to 5% can be withdrawn without a tax liability

Answer 361

Treated as part of individual's income

Answer 362

Trustees chargeable on gain and no top slicing relief

Answer 363

Beneficiary taxed and no top slicing relief

Answer 364

Gross roll-up - as not taxed until chargeable event

Answer 365

Total gain multiplied by the following fraction number of days policyholder resident in UK divided by number of days policy has run

Answer 366

If policy holder was outside the UK, for the whole time

Answer 367

Always top-sliced back to the start date Depends if time apportionate relief applies - if no, back to last chargeable gain. If yes, back to start date, but reduced for periods not UK resident

Answer 368

Offshore, which reduces the final net return received by an investor

Answer 369

Onshore bond gains benefit from indexation relief up to 31.12.17, net gain taxed at 20% or 25%, whereas offshore gains for higher and additional rate taxpayers are taxed at 40% and 45%, no indexed relief

Answer 370

Some investment income received by an offshore fund may be received after deduction of non-reclaimable withholding tax, reducing the effect of the gross roll-up. In addition, there would be no credit for this in the chargeable gain, leading to possible double taxation

Answer 371

If an investor has a portfolio of shares and wants to manage it themselves rather than life office Deemed gain is 15% of the total premiums paid at end of the year plus total deemed gains from previous years

Answer 372

Yes - original owner can assign product to someone else for a payment normally higher than surrender value Buyer - although future premiums have to be paid, maturity value may be high, early profit if life assured dies

Answer 373

Qualifying policy is sold after ten years, or three-quarters of the term, it is not a chargeable event, no income tax. If sold \< ten-year or three-quarter term, it is chargeable event, and selling a non-qualifying policy is always a chargeable event. Higher or additional-rate taxpayer, the gain is subject to 40% or 45% tax. Gain is subject to top-slicing relief No CGT liability on seller, provided they are the original beneficial owner

Answer 374

Qualifying policies with limited premiums

Answer 375

£270 per year or £25 per month

Answer 376

Yes - known as baby bonds

Answer 377

Free of UK tax on investment income and capital gains

Answer 378

Minimum amount is 75% of total premium

Answer 379

Index trading funds listed and traded on stock markets Similar to index-tracking pooled funds but traded like a single share through stcokbrokers

Answer 380

Yes broker fees No stamp duty Less than 0.5%

Answer 381

Fully replicating index - buy exactly same investments and rebalance when index rebalanced

Answer 382

Income tax on dividend payments CGT on gains arising from disposal

Answer 383

Offshore - check fund prospectus to ascertain tax treatment

Answer 384

Similar to ETF, tracks performance of an underlying commodity or basket of commodities, or index designed to measure value of that commodity

Answer 385

Similar to ETF, traded on stock exchange, performance tracks movement of an index. It is a type of bond issued by a bank, maturity date, do not pay interest and there is no portfolio of investments, they use derivatives to track the index

Answer 386

As they are unsecured bonds, their value will be affected by credit rating of the issuer & potential default risk

Answer 387

* Shares in listed property companies * Property unit trusts and investment trusts * Insurance company property funds * Real estate investment trusts (REITs)

Answer 388

* Diversified over a number of properties * Share prices are affected by management and borrowing, as well as asset value * Property shares can be highly geared - more volatile * Share prices will rise and fall independently of the underlying asset values - supply and demand: stock market and company risk * Company liable to corporation tax on capital gains and rental income

Answer 389

Invest primarily in shares and securities of property companies, can hold small % in direct property

Answer 390

Value of the investments held in the fund

Answer 391

No tax on gain within fund Investor is subject to CGT when gains realised on disposal

Answer 392

At least 60% net income from exempt property investment business Value of property investment business must be at least 60% of the total assets No corporate investor can hold 10% or more of the fund’s NAV

Answer 393

* FCA authorised OEIC that invests mainly in property * Taxation moves from fund to investor * Property income is ring-fenced as ta exempted in fund, but other income 20% corporation tax

Answer 394

* Property income - paid net of 20% income tax * Interest income - paid gross * Dividends - paid gross

Answer 395

* Funds which specialise in direct holdings of commercial property * Available as regular and single premium

Answer 396

* Unit value linked to property value * Cannot borrow * Liquidity is higher than direct property investment * Income and capital gains are subject to up to 20% tax within the fund

Answer 397

* Provides a liquid market in property investment * Widely accessible * Tax treatment is closely aligned to direct investment in property

Answer 398

* Must be closed ended, so not an OEIC * UK resident for tax * Ony issue one class of ordinary share * Listed on recognised stock exchange (includes AIM)

Answer 399

* Ring-fenced property letting business, corporation tax exempt * Non-ring-fenced business, other activities, e.g. property management services – profits and gains are subject to corporation tax

Answer 400

* At least 75% gross profits from the property rental (tax-exempt part) * Value of the assets in the tax-exempt part must be at least 75% of the total value of the assets (ignoring secured loans) * REITs cannot have an excessive amount of debt financing – interest on borrowings has to be at least 125%, covered by rental profits

Answer 401

* Distribution from ring-fenced part - paid of 20% income tax - HRT and ART will have to pay extra income tax * Distribution from no-ring fenced part - treated as other UK dividends - investor tax will depend on individual position * Gains subject to CGT

Answer 402

Investor provides medium to long term finance in return for an equity stake in an unquoted company

Answer 403

* EIS * SEIS * VCT

Answer 404

* Income tax relief at 30% given for qualifying investments * Up to £2 million - if £1 million is invested in knowledge intensive companies * Investor must have income tax liability of at least amount being claimed * Relief is given as reduction to investor's tax liability

Answer 405

* Relief withdrawn if shares are disposed of within three years, except to spouse and not on the death of investor * Investor - carry back income tax relief to previous tax year

Answer 406

* Reinvest capital gain within 1 year and 3 years after disposal * Deferred gain is bought into charge on diposal of EIS, unless reinvest * CGT rate is current rate * Gains on the disposal of EIS that qualified for income tax relief are exempt from CGT, as long as the shares are held for 3 years * Losses are allowable, and can be set against chargeable gains or income

Answer 407

100% business relief for IHT purposes as unquoted companies

Answer 408

* Unlisted and no plans to become listed * Fewer than 250 employees (500 if knowledge intensive (KIC)) * Gross assets less than £15m before shares issued and £16 m after * Raised less than £5m under VCT in 12 months (£10m if KIC), less than £12 m in lifetime * Must be made within 7 years of company's first commerical sale, (10yrs is KIC) * Qualifying trade with permanent UK base

Answer 409

* Not connected to company * Non-UK resident is elgible, but can only claim tax relief on income tax liability

Answer 410

* Company may fail * Held for 3 years * May be difficult to dispose of shares, as the market is illiquid

Answer 411

* Unquoted at the time of issue of the shares * Employ 25 people or less * Less than two years old * Less than £200,000 in gross assets * Meet the qualifying trade rules

Answer 412

50% of share cost up to a maximum of £100,000 a year

Answer 413

* All money raised must be used in 2 years * Income must be wholly or mainly derived from shares or securities and retain 15% * At least 80% in qualifying holdings * Not more than 15% in a single company * At least 70% in new ordinary shares * At least 10% in ordinary, non-preference shares * Exempt from corporation tax on disposal of investments - can be distributed as dividends with no tax liability for investor

Answer 414

Listed fund with pooled characteristics Investor buys fund shares

Answer 415

£200,000 30%

Answer 416

5 Years - only available on subscription of new shares

Answer 417

* Tax free dividends * Tax free CGT * No loss relief * No corporation tax on gains on disposal

Answer 418

* Carrying out research, development or innovation * At leasts 10% of operating costs spent on this and at least 15% in one of past 3 years * Creating intellectual property * 20% of employees carrying out reserach and development

Answer 419

* Normally must be listed on recognised stock exchange * Shares acquired with previous 90 days from SAYE or share incentive plan

Answer 420

* Resident in the UK for tax purposes * Crown employee or spouse or civil partner if they don't live in the UK * 18 or over - stocks and shares ISA or innovative finance ISA * 18 or over but under 40 - Lifetime ISA * 16 or over - cash ISA

Answer 421

* Unit trust and OEIC * Investment trust * Managed * Self-select * Corporate * Derivative-based * Cash * Help to buy * Innovative finance * Lifetime

Answer 422

Select own holdings sometimes restricted to FTSE 100

Answer 423

Only invest in one company - charges are generally lower

Answer 424

Offer stock market index-linked capital return at the end of 3 - 5 years - a fixed income or a minimum maturity guarantee

Answer 425

Peer-to-peer lending

Answer 426

15 working days - Cash and Cash lifetime 30 working days - Stocks and shares, innovative and lifetime

Answer 427

Becomes a continuing account of a deceased investor No funds can be added, income and gains remain tax free until estate administered and ISA closed, or 3 years from date of death

Answer 428

Spouse inherits one-off additional ISA allowance to reinvest into their ISA set at higher of value at date of death or investment value when passed on

Answer 429

* No charges on stakeholder cash ISA * Minimum deposit can not be higher than £10 * Unlimited withdrawals paid 7 days or less * Interest rate no less than 1% below BoE base rate * If BoE increases, rate must follow within 1 month

Answer 430

Limited to 1.5% of fund during first 10 years and 1% thereafter

Answer 431

Can not be higher than £20 No more than 60% in riskier assets (shares and property)

Answer 432

* Some of return in good years into smoothing account * If smoothed account is low, policyholders can be charged extra * Managers must make info available about smoothing policies * Whole of with profit fund and smoothing account are for benefit of policyholders

Answer 433

* A financial contract whose value is derived from the value ofan underlying asset * Allowing exposure of underlying asset without ownership

Answer 434

* Bought and sold on recognised exchange - exchange traded - standard terms and conditions therefore cheaper and easier to trade * Over the counter (OTC) - created bespoke for a customer's needs and sold directly to them

Answer 435

* Quality * Quantity * Delivering date * Delivery price

Answer 436

* Exchange traded forward contract * Buy and sell at specified future date at price agreed when contract made

Answer 437

Required to establish a contract - initial margin i.e. a deposit

Answer 438

Daily price changes - if fails to pay exchange close all client's open positions by buying equal but opposite contracts

Answer 439

Revalued on daily basis - takes into account any movement in prices and closely mirrors change in price of underlying asset

Answer 440

Long view - market price increase therefore on agreed date can buy at a lower price than market

Answer 441

Short view - hoping the market price falls, therefore they can sell at a higher price than the market

Answer 442

Pays profits to one side of contract and receive losses from other - at expiry of contract client will already have been credited with profit

Answer 443

Seller delivers to buyer and buyer pays seller the exchange delivery settlement price (EDSP)

Answer 444

An option gives the buyer the right, but not obligation to buy or sell

Answer 445

* Buyers pays premium - cost of option plus additional commission * Does not have to make margin payments

Answer 446

* Receives premium, pays commisison and makes margin payment * Initial and variation margin

Answer 447

Agreed to buy at

Answer 448

Agreed to sell at

Answer 449

Strike price or exercise price

Answer 450

* Exercise it * Sell it * Let it expire - worthless

Answer 451

European - can only be exercised at expiry American - can be exercised at any time

Answer 452

Current price of the underlying asset is above the option’s strike price

Answer 453

Current price of the underlying asset is below the option’s strike price

Answer 454

* In the money - have intrinsic value * Out of the money - no intrinsic value * At the money - strike price equals current price

Answer 455

Current price against exercise price Ignore the premium paid

Answer 456

* Amount an investor is willing to pay for an option above its intrinsic value, in the hope its value will increase before it expires - favourable change in underlying asset value * Directly related to how much time until expiry - erodes throughout option's life

Answer 457

* Protect an existing exposure against future adverse price movements * Try to profit by correctly forecasting future price movements

Answer 458

* Wait until money received and buy at higher price * Borrow to invest immediately and repay interest * Use derivatives - futures or call options

Answer 459

If market falls is limited to the premium paid for the option plus transaction costs

Answer 460

* Sell part of the portfolio but if market rises they could lose out - may be restrictions if mandated to hold small amounts of cash * Could use derivatives - selling futures or buying put options

Answer 461

Market fell - profit on futures used to offset losses on portfolios Market rose - loss on futures will offset gain on portfolio

Answer 462

Market fell - gain on option used to offset loss Market rose - let option expire and pay premiums and transaction costs

Answer 463

* Trade underlying physical assets * Sell futures on 10% of portfolio abd buy long gilt futures

Answer 464

* Lower dealing costs * Speed of dealing * Liquidity

Answer 465

* If rising interest rates, bond prices would fall - sell long gilt futures * If falling interest rates, bond prices would rise - buy long gilt futures

Answer 466

Writers - risk is unlimited in return for premium received - most writers are banks or specialist traders

Answer 467

Increase income to fund by receiving premiums paid Covered if underlying stock is owned Uncovered if not owned

Answer 468

Receives premium income but has obligation to purchase an asset at a fixed price. Hope the option will not be exercised - occurs if asset has a price above the exercise price at expiry

Answer 469

Profits from futures and options usually chargeable to CGT If classed as trader, their profits taxed as income

Answer 470

* If call option exercised - cost of option treated as cost of purchase * If put option exercised - cost of option is allowable deduction * If option expires - treated as disposal for CGT therefore loss

Answer 471

* If position closed - money received treated as considration for disposal and money paid = cost * If position not closed -any payment made or received treated as consideration or cost of disposal

Answer 472

Pooled investments, fund manager invests in traded securities. Actively managed to seek positive returns

Answer 473

* Hedge against market downturns * Invest in asset classes, that are trading below their true value * Use return enhancing tools, e.g. gearing, derivatives and arbitrage

Answer 474

Give an absolute return with limited volatility rather than trading n index and can even have negative correlation to the market

Answer 475

Currencies and shares believed to be trading below their market value

Answer 476

Made up of multiple hedge funds

Answer 477

* Long/short funds - equities and bonds * Relative value funds - market neutral - rely on arbitrage * Event driven funds -uncorrelated with markets, lower volatility * Tactical trading fund - similar to hedge. Trade in currencies, bonds, equities and commodoties - use long/short approach

Answer 478

Identify and exploit pricing anomalies between similar investments

Answer 479

* Risks are dependent on strategies adopted by fund manager - lack transparency and difficult to assess * If highly geared - risks magnified if things go wrong * Very expensive - high annual charge, c. 2% plus c.2% manager fee

Answer 480

Acheive a specific set of investment objectives with a speficied risk and reward profile

Answer 481

An element of riskier or higher performing asset with element of capital protection

Answer 482

* Fixed term * No early withdrawals (some may allow partial) * Return of capital or income * Low fixed interest yields = mechanisms such as caps on growth, kick out clauses, capital protection lost if barrier is crossed, used * Minimum or maximum returns are pre-specified * Kick out clause - product matures earlu if performance threshold reached * No secondary market * Offer guarantees * Returns based on index

Answer 483

* 100% capital protected * Partial capital protection/ soft protection * No protection * Investment notes

Answer 484

Zero-coupon bond - fixed interest no income, sold at a discount to its par value, providing known amount at maturity - to provide the capital protection Call option - OTC five year on FTSE 100, capped at specified limit - provide return on FTSE 100

Answer 485

Protection only provided if index doesn't fall below a certain level - this is know as soft protection or contingent capital protection. FCA classes these as SCARPs - structured capital at risk products

Answer 486

* Once issued listed on London Stock Exchange * Investor can sell note and take profits early if markets rise before maturity * Underlying investment choice is wider * Typically provided by investment banks and more complex than retail packaged products

Answer 487

* Return - how is it calculated * Risk profile - underlying asset * Costs * Encashment penalties * Credit/counterparty e.g. Lehman Brothers

Answer 488

* Wide range of underlying assets * No exposure to managers * Capital protection - know gain or loss

Answer 489

* Caps on participation rates limit return if market rises * Kick-out feature lead to missing out on future growth * Averaging of index measurements may dilute returns in rising markets * If product can be not be sold on sceondary market, maturity could take place during market fall, profits reduce * Falls in equity and market could lead to lose in capital protection, which can not be regained * Not suitable for funds needed at short notice

Answer 490

* Lower costs * Portfolio can be tailored to client's needs * Increased transaparency of costs * Can exclude holdings for specific reason (e.g. ethical) * Gains subject to CGT but often avoided due to annual exemption * Larger portfolios can enjoy economies of scale

Answer 491

* Greater volatility as usually fewer investments held * For smaller portfolios higher costs * Requires high involvement from investment manager * Maybe greater admin * VAT on management fees

Answer 492

* Wide variety * Spread of risk * Can give exposure to markets not available through direct investment * No CGT in Trust/ VAT * No stamp duty

Answer 493

* Greater management fees * Changes to funds can be expensive * Little direct involvement for investor

Answer 494

* Cost of purchasing shares is often lower * Higher reward - trade at discount and gearing * Can provide high income

Answer 495

Higher risk as trade at discount and gearing

Answer 496

* Equity funds - returns generated through capital gains, alhtough dividends are permissable if approved by Sharia board * Commodity funds - Halal commodities bought at fixed price to re-sell for profit - no futures as deemed to be gambling * Ijarah funds - hold tangible assets provide rent. Sukuk is issued to subscriber, represents proportionate beneficial ownership in asset

Answer 497

* Determine client's requirements * Analyse client's financial position * Formulate a strategy to meet objectives * Produce recommendations and implement * Revisit investments, objectives and strategy

Answer 498

* Knowledge and experience * Financial situation * Investment objectives * Attitude to risk * Capacity for loss

Answer 499

* How financial adviser will be paid * The service that will be provided * Timescales involved * Duration of agreement * Frequency of the contract

Answer 500

Client has understanding of: ## Footnote * Amount of reporting on investments * Frequency of reviewing client's circumstances and plans * Adviser alerting client to changes

Answer 501

* Hard facts - e.g. salary * Soft facts - e.g. needs, wants, desires * Client's real objectives - motivation for investing * Level of risk they are comfortable with * Amount they want/ should save * How long they need to invest for * Any ethical considerations

Answer 502

* Needs and obectives * Assets and liabilities * Income and expenditure * Priorities * Attitude to risk

Answer 503

Clear understanding of client's goals and expectations

Answer 504

How much risk they are willing to take

Answer 505

How much variance from their goal they can manage

Answer 506

How much they can afford to lose

Answer 507

* Asset allocation * Ethical investment * Taxation as a factor for investment choice

Answer 508

* Overview of customer's circumstances * Summary of needs * Summary of recommendation * Details of their risk profile * Details of asset allocation and wrapper * Reason why recommendation suitable * Costs and risk summary

Answer 509

* Capital preservation * Capital appreciation * Current income * Total return - long term asperations for growth and income

Answer 510

* Time horizon - if short horizon need greater capital preservation * Liquidity - money needed in emergency * Tax * Legal and regulatory * Unique needs and preferences

Answer 511

* Backward looking - modern portfolio theory * Uses mathematical analysis based on risk/reward * Uses efficient frontier

Answer 512

Correlation between assets

Answer 513

* Forward looking * Uses avaerage rates of return * Uses historical data on long time periods * Pays attention to recent volatility

Answer 514

* Initial yield on investments * Overall rate of income generated * Level of inflation or interest rate * Rate of growth in company dividends

Answer 515

Withdrawing too much capital during a market downturn - drag on investment growth

Answer 516

* Set up on set of standard assumptions * Apply assumptions to a particular asset allocation * Results plaotted graphically showing the statisical distribution of possible outcomes

Answer 517

* Uses a mathematical technique to generate a problematic assessment of returns and volatility * Greater dependence of assumptions than optimisation models - often a small change in assumption will reslut in large change in output

Answer 518

* Risk * Historical data * Forecasts * Costs * Implementation

Answer 519

Returns do not always follow normal distribution

Answer 520

Maybe a poor guide for future performance

Answer 521

May be inaccurate

Answer 522

Assumes rebalancing which doesn't take into account transaction costs

Answer 523

May use different specific assets

Answer 524

* Return required * Volatility accepted * Correlation of assets

Answer 525

* Determine asset allocation * Allocate geographical spread * Choose sector weightings * Choose stocks

Answer 526

Select stocks on own criteria - reverse of top-down No attention to index benchmarks

Answer 527

* Value - company's value is higher than price placed on market * GAARP - companies with long sustainable advantages e.g. quality of management * Momentum - being ahead of latest swing of opinions * Contrarianism - going against the trend

Answer 528

* Fund objectives * Costs and charges * Strength and reputation of management group * Skill and reputation of fund manager * Type and structure of fund e.g. open-ended, geared.... * Fund performance * ESG - transparent, diverse?

Answer 529

* Relevant experience * Structure and style of investment * Size and access to resources * Quality of staff * Administration * Consistency in strategy

Answer 530

* Client's individual tax and financial circumastances * Underlying assets in tax wrapper

Answer 531

* Hold all investments in one place * Less paperwork and admin * Lower costs and transparent * Automatic rebalancing * Access to various tax wrapper * Asset allocation across wrappers

Answer 532

Have permission to trade without seeking permission on every trade

Answer 533

* Explanation of client's risk profile and recommended portfolio * Fund selection method * Explanation of tax wrappers * Future reviews * Costs * Summary of features

Answer 534

* How portfolio will be managed * Overall investment objective * Classification of risk

Answer 535

* Legal constraints - e.g. trust deeds * Nature of liabilities - proce inflation * Cash flow * Taxation

Answer 536

* Client circumstances * Regulation and taxation * Market environment * New products and services

Answer 537

* Purchases and sales * Summary portfolio valuation * General market commentary * Recommended changes in strategy

Answer 538

* Under Mifid II every 3 months and breakdown of costs? * If portfolio falls by 10%

Answer 539

* Change in client's objectives * Market conditions * Client instructions from client * Consistent underperformance

Answer 540

* Understanding investment markets generally * Assessing competence of fund managers * Rewarding investment managers * Charging performance related fees

Answer 541

* Equities tend to outperform fixed interest but periods when this isn't the case * When predictions more specific, the value of past performance seems to diminish * Most systems use past performance to select funds but depends on future correlation and volatility

Answer 542

Calculation of the investment return over a stated period

Answer 543

* Has the investment manager added value by meeting or outperforming a suitable benchmark * How the investment manager achieved the calculated return (e.g. by taking high or low risks, or having a particular stock or asset strategy

Answer 544

Calculates return on an investment over period of time it is held, expressed as a % of initial investment

Answer 545

R = D + V1 -V0 / V0 R = rate of return D = Income paid to the investor during the term V1 = value at end V0 = value at start

Answer 546

Calculates return on investment over a period if new money is added or taken away

Answer 547

D + V1 - V0 - C Divided by V0 + (C x n + 12) C = cash withdrawn or introduced n = number of months remianing in the year after cash added or withdrawn

Answer 548

Not appropriate when comparing different portfolios - because strongly influenced by timing of cash flows - this is outside fund managers control

Answer 549

Attempts to eliminate distortions caused by timing of new money by breaking period down to sub-periods for each contribution or withdrawal

Answer 550

1 + R = (1 + r1) (1 + r2) (1 + r3)......(1 + rn) R = TWR and ri = holding period return in each sub period TWR = V1/ V0 x V2/ (V1 + C) - 1

Answer 551

Excess return for every unit of risk that is taken to achieve return

Answer 552

Active funds against each other - only funds with similar objectives

Answer 553

Return on the investment - risk-free return Divided by Standard deviation of the return on the investment

Answer 554

Over shorter periods (e.g. monthly)

Answer 555

Better return on investment compared to risk

Answer 556

Difference between the return you would expect from a security, given its ß, and the return it actually produced

Answer 557

Cannot be explained by movements in overall market

Answer 558

Value added or taken away by a manager through active management

Answer 559

a = actual portfolio return - [Rf + ßi (Rm - Rf)] Rf is the risk-free rate of return; Rm is the market return; and ßi is the beta of the fund or portfolio (Calculate the inner brackets first)

Answer 560

Portfolio performance in relation to performance of a benchmark

Answer 561

Gauge the skill of fund managers and shows the consistency with which a manager beats a benchmark index

Answer 562

Rp - Rb Divided by tracking error

Answer 563

Positive - Performance better than benchmark, higher value added by active management Negative - Investor would have been better off matching index using a tracker or index fund

Answer 564

Evaluates how managers achieve returns

Answer 565

* Asset allocation * Stock selection * Market timing * Risk - may take more or less risk than the benchmark depending on market view

Answer 566

* Establish benchmark * Benchmark asset allocation * Benchmark returns - return it would achieve if performed in line with index * Comparison of asset allocation * Stock selection or sector choice - compare index performance for each asset class with managers actual performance

Answer 567

* Pension income * Distribution from fixed interest collectives * Distribution from equity collectives * Investment bonds

Answer 568

* How initial investment treated * How funds are taxed within wrapper * How proceeds are taxed on investor

Answer 569

Interest and dividends paid gross No CGT

Answer 570

* Full replication - fund fully replicates the index * Stratified sampling - fund holds a sample of shares in index as not suuficent assets for full replication therefore holds specific company in each sector * Optimisation/ synthetic - fund buys and sells shares as index using computerised model

Answer 571

* Lower costs * Hard to beat index * If fund managers do beat index it's usually often by taking more risk

Answer 572

* Following market can be a rollercoaster * Can never index - costs/ tracking error * Mergers can distort index

Answer 573

* Negative screening - fund will avoid certain unethical practices * Positive screening - fund allows for some tolerance to unethical practice but will seek out ethical options * Neutral approach - firms considered to be socially responsible

R02 Flashcards

(602 cards)