What effect does inflation have on monetary values?
Erodes monetary values
Cash and fixed-interest securities are particularly vulnerable to inflation.
In a recession, what type of investments are generally considered losers?
Equities
This reflects the typical performance of stocks during economic downturns.
What do cash investments provide for an investor’s money?
Security
Cash investments are seen as a safe place to store funds.
What are the general characteristics of cash deposits?
- Receive regular interest at prevailing rates
- No investment risk
- Repaid in full at end of term or on demand
- Return is just interest, usually fixed or variable
- Interest paid gross of income tax
- Subject to penalties on early withdrawal
- No potential for capital growth
Cash deposits are typically held in bank or savings accounts.
What is a major risk associated with cash investments?
- Bank default (insolvency)
- Inflation risk
- Interest rate changes
These risks can significantly impact the returns on cash investments.
What is the FSCS?
Financial Services Compensation Scheme
It is a statutory fund of last resort if a bank fails, protecting deposits up to £85,000.
What is the protection limit provided by the FSCS?
100% of the first £85,000
This applies to individual account holders in authorized institutions.
True or false: The FSCS covers all banks, including those in the Channel Islands.
FALSE
The FSCS does not cover banks outside the EEA or in the Channel Islands or Isle of Man.
What is reinvestment risk?
Risk that original investment made at high interest rates cannot be secured again at maturity
This was a significant issue for pensioners in 2009.
What are offshore accounts often lured in with?
Potential higher interest rates
However, they have drawbacks, including lack of FSCS coverage.
What do instant access accounts provide to investors?
Immediate access to funds
Interest rates generally follow the Bank of England base rate.
What are restricted access accounts known for?
Generally higher rates than instant access accounts
They come with higher risks due to restricted access.
What is a term deposit account?
Fixed rate of interest with no or limited access to capital before maturity
Suitable for investors seeking certainty of income.
What do structured deposits pay interest based on?
Performance of an equity index (usually FTSE 100)
They offer returns based on the greater of the original investment or a percentage of the index change.
What is the ISA limit for tax-free interest?
20k limit
Cash ISAs allow savers to receive tax-free interest.
What are NS&I products?
Government investments guaranteed by the government
They can be bought online, by phone, or by post.
What is the minimum investment for guaranteed income bonds?
£500 minimum investment
They offer guaranteed monthly income and are taxable against the personal savings allowance.
What are money market investments primarily used for?
To meet sudden cash demands with high liquidity
They allow banks and building societies to manage their cash surpluses.
What are Treasury bills?
Issued by government to finance short-term cash needs
They are sold at a discount and do not pay interest.
What is a certificate of deposit?
Receipt from banks for deposits placed with them
They have a fixed term to maturity and cannot be withdrawn before maturity.
What is the risk associated with corporate bonds compared to government bonds?
Higher risk of default
The return demanded in the form of a coupon is usually higher.
What is a convertible bond?
Unsecured loan stock with an option to convert to ordinary shares
If not converted, it reverts to a standard corporate bond.
What is the yield curve?
Compares the period to redemption of a bond
It illustrates the relationship between interest rates and bond maturities.
What is reinvestment risk?
Reinvestment risk is the possibility that an investor will be unable to reinvest cash flows from an investment, such as coupon payments or interest, at a rate of return comparable to the current rate.
-
unit 126
-
1. Characteristics of Asset classes7
-
Macroeconomic environment impact on asset classes (6qs)26
-
3.Main investment theories (7Qs)20
-
Time Value of Money (3qs)2
-
main types of risk against main investments (5QS)15
-
section 1 - characteristics , risks, behaviors and tax (23Qs)71
-
section 2 - characteristics , risks, behaviors and tax (23Qs)19
-
section 3&4 - characteristics , risks, behaviors and tax (23Qs)21
-
Investment Advice16
-
summarisation13
