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OVERVIEW FINANCIAL MARKET(2) - PT. 1 - Coggle Diagram
OVERVIEW FINANCIAL MARKET(2) - PT. 1
CASH INVESTMENT
Comparing rate of interest
Interest on acc that is paid more frequently, annual return is higher
Comparison can made by compound annual rate of interest(CAR)
HIGH STREET BANK DEPOSIT
Suitable for investment of small sum in short period
Low interest rate
Deposit acc facilities are available from banks
High interest deposit and cheque acc: have large amount of money - can place money in high interest acc
Other facilities: Bank offer special facilities for larger amount - get fixed rate quotes for money market deposits
Option deposits: For predetermined period - interest rate reflect the term nature of arragement
FINANCE COMPANY DEPOSIT
Larger companies insist on min deposit
They pay a higher rate of interest than for basic bank deposits
Finance company involved in lending of above average risk
BUILDING SOCIETIES DEPOSITS
Offer cheque or credit card facilities
Wide range of investment facilities
Mainly for non-corporate investors
MARKETABLE SECURITIES
Price of marketable securities by
Stock interest rate normally fixed - but may different compared in money market as a whole
General interest rate rise, price of stock will fall & vice versa
Risk payment of interest and eventual repayment of capital
Length of time to redemption
Yield on fixed interest
Concentrate on gilts
Principles involved apply equally to any other fixed interest stocks
Interest yield
Coupon rate expressed as a percentage of the market price
Influences
ACCRUED INTEREST
Price paid by the purchaser must reflect this amount of accrued interest
CUM (INT) AND EX DIV (INT)
Anyone that buys this share will not receive the next interest or dividend payment
Purchaser of stock cum div receive next interes/dividend payment
Redemption yields
Yields determine by market price
Factors effecting choice
Investor looking for income or capital appreciation
Investors tax position
Risk inherent in gilts
Investors' business
[(Redemption price - current price) / no. of years to redemption] x $100/current price
UK GOV SECURITIES
GILTS
Securities issued by UK gov.
Shorts - lives up to 5 years
Medium - lives 5-15 years
Longs - more than 15 years
Undated stock - irredeemable/1 way stock
Index-linked stock
FIXED INTEREST GILTS
Most gilts are fixed interest
INDEX-LINKED STOCKS
Linked to inflation
Interest is payable half early
Guaranteed real return equal to the coupon rate
UK LOCAL AUTHORITY & OTHER PUBLIC SECTOR
LOCAL AUTHORITY STOCK
Similar to British Gov. stocks
MAIN DIFFERENCES:
Security not as good as central gov.
Thinner market - not much transaction
PUBLIC BOARD LOAN
Agricultural Mortgage Corporation
Port Authorities
Investors in Industry
CERTIFICATES OF DEPOSITS
Certificate indicating that sum of money has deposited with bank and will be repaid at a later date
Wants cash immediately
Offers an attractive rate of interest and can easily be sold
Document recognizes obligation amount of bearer
Entitled to the money on deposit - interest on stated date
Present CD on appropriate date to recognized bank
CD can be liquidated at any time
BILLS OF EXCHANGE
Initiated by person who need the payment
Features
Duration/maturity: 2 weeks - 6 months
Denominated in any currency
Value up to Sterling 500k/bill
DISCOUNTING BILLS
Negotiable instrument
Holder of bill can hold the bill until maturity
Can also sell before maturity - at discount value, transferred by simple endorsement
Marketability of bills depend on
Credit quality of the drawee
Existence of liquid secondary market in bills
Trade bill: Bills drawn by one non-bank company on another company
Bank bills: Bills of exchange drawn and payable by a bank - most common is banker's acceptance
Basis of trade
Traded on either an interest rate or disc. basis
Interest rate: Principle sum is lent - borrower repays principal+interest at maturity
Disc. basis: Specified sum is payable at maturity to the holder of a money market instrument
OTHER COMMERCIAL STOCKS
BONDS
Term given to any fixed interest (mostly) security
Long-term
May or may not be secured
COMMERCIAL PAPER
Issued by company
Traded at discount reflecting the yield required
Short-term borrowing (3 months)
Unsecured and risky
LOAN STOCKS
Secured on a particular asset of the business
Long-term