CISI Investment Risk and Tax Planning - Chapter 1
1. Why should you hold cash?: - Liquity (instant access) for planned spending or emergency funds
- Safe since capital is unlikely to be lost since there is no captial gains and interest is paid so you get real return
2. What is the interest rat...
1. Why should you hold cash?: - Liquity (instant access) for planned spending or
emergency funds
- Safe since capital is unlikely to be lost since there is no captial gains and interest is paid
so you get real return
2. What is the interest rate ?: Interest is a percentage of funds deposited - higher the
deposit , higher the rate
3. Types of interest rates?: Fixed or Variable interest rates
4. Difference between Gross and Net Interest: Gross is interest that is paid before
the deduction of income tax or other charges are deducted. Net interest rate is effective
interest rate after tax is deducted from the gross rate.
5. What is the Annual Equivalent rate?: The AER makes it easier to compare
savings accounts in the UK by illustrating how much interest you could earn from a
savings account if it were open for one year. (It is usually quoted gross)
6. What is compound interest?: The interest you earn from a savings account could
be paid to you as you earn it or at a later date, or it could be paid back into your savings
account, from which you could earn interest from your original deposit, as well as on any
interest you've earned. This process is known as compounding.
7. Features of National Savings and Investment Products: - Only risk free de-
posits since it's government backed
- It's an agency of the chancellor, accountable to the Treasury.
8. What is peer to peer lending?: - Lending to individuals without using a financial
intermediary (ie. bank)
- It brings borrowers and lenders together online in return for a fee.
9. What are the disadvantages of peer to peer lending?: - Default on loans by
the borrowers (ie. unable to pay it back)
- EXTRA: Loans are sometimes pooled to diversify risk.
-There is high APR on peer to peer lending compared to getting loans
from a bank
- For lenders, the money you lend via P2P is not covered by FSCS. So you can't incur for
any losses.
10.Is peer to peer lending taxable?: Money earned through peer-to-peer lending is
usually classed as income, so is taxable. So it must be declared in full to HMRC.
11.Is it possible to hold peer to peer lending in your ISA?: Yes, An Innovative
Finance ISA (IFISA) allows P2P loans to be held in an individual savings account (ISA). This
means you can receive interest from P2P loans tax free and avoid being taxed on any
capital gains
, CISI Investment Risk and Tax Planning - Chapter 1
12.Regulation for peer to peer lending: Before you lend through a P2P lender you
should check that:
it's regulated by the Financial Conduct Authority.
13.What is a gilt?: A Gilt is a bond issued by the UK Government
, CISI Investment Risk and Tax Planning - Chapter 1
14.What are the features of Gilts (UK Government Bonds)?: - Name: The name
given at issue
- Redemption: The year when the gilt is repaid
-Coupon: Expressed as an annual %of the nominal value
-Nominal Value: The capital payment. The holder receives at redemption
15.What does the UK Government raise funds for?: The UK Government raises
funds for the PSNCR (Public Sector Net Cash Requirement). This is made up of three
component net cash requirements:
- Central Government (CGNCR)
- Local Government (LGNCR)
-Public Corporations (PCNCR)
16.What is debt management office (DMO)?: This ensures that the government
can borrow the money it requires to fund the central government net cash require- ment
(CGNCR) by issuing bonds to lenders. This is part of the public sector net cash
requirement
17.How are gilts classified based on how long they have to run before they
wiil be redeemed (ie. before the gov repays back the capital?: - The Financial
Times Method classifies gilts as
>Shorts - under 5 years to run to redemption
>Mediums - 8-15 years to redemption
>Longs - over 15 years to run
-Market Convention
>shorts - 1-7 years to run to redemption
>Medium - 8-15 years to redemption
>Longs- over 15 years to run
18.What are the types of gilts?: Index Linked Gilts (linkers) - both the interest rate
and the capital redemption on these gilts is calculated by reference to the inflation rate
(based on CPI), as measured at a set point before the pay date.
Convertible Gilts - The owner has the right to convert the gilt into
predefined amounts of a different gilt at some time in the future.
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