1 Alistair tells you that when he was asked to choose a government security be could not differentiate one form another .The two that his father had suggested were:
(1)8% Treasury Stock 2014(his eventual choice)
(2)3.5%Index Linked Stock 2011
Explain to Alistair the Gilts’ main features of each of the above
(1) Gilts will normally be represented in this format. The government has issued this bond and is guaranteeing to pay the investor ￡8 interest annual for every ￡100 of stock he holds until the year 2014.
In 2014 the government will refund the holder ￡100 for every ￡100 of gilts that they hold.
(2) These gilts provide interest payment and capital repayment that are linked to CPI which measures the rate of inflation. Inflation erodes the return to the investor by reducing the real return an investor earns. The interest is the 3.5% of the inflation rate annual for every ￡100 of the stock he holds until the year2011.
2 Alistair has received his Contract Note detailing his recent purchase of gilts. He is unclear as to how the cost of the gilts was calculated by his broker. Using the following information calculates the cost of the purchase.
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(1) The purchase took place on the 10 July
(2) The interest is paid half yearly on 1 April and 1 October
(3) Ignore brokerage fees in your calculation
The last payment date is 1 April. On 10 July an investor buys ￡ 20,000 nominal of Treasury 8% @ 104. How much does he pay?
Price ￡20 000 @ 104 ￡208 000
￡20 000 * 8% = ￡1600
￡1600 * (102/365) = ￡447.2
Total pay: ￡10 150 + ￡447.2 = ￡208 447.2
3 Alistair has recently inherited 5000 ordinary Shares in his portfolio from his late aunt no knowledge of their features and what rights he has as an ordinary Shareholders
Main features of the ordinary shares and the rights of ordinary shareholders (Four or applicable rights)
Ordinary shares, common stocks, also as know as equity securities or equities, represent ownership shares in a corporation. Each share of common stock entitles
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its owner to one vote on any matters of corporate government put to a vote at the corporation’s annual meeting and to a share in the financial benefits of ownership.
The right of ordinary shareholders:
To be invited to attend all meetings, to receive annual report and accounts, to be given an opportunity to subscribe for rights and convertible issues on a prorate basis. This is called a preemptive right and to sell their shares, or transfer without restriction and to share in the profits of the company- although this does not mean the company is forced to pay a divined.
4 Alistair has received notification from Alpla plc that they intend to make a two for five right issues. Although Alistair is aware of what a right issue is he does not inder stand the financial implications of the issue.
Calculate the theoretical ex-rights price of the issue based on a right price of 230P and a market value of 270P （page 103）
(5000*2.7+2000*2.3)/7000
5 EPS= Profit after taxation/number of ordinary share holders=240/480=0.5
p/e=current share price per share/EPS=2.50/0.5=5
Earning yield=EPS/current market price per share=0.5/2.5%=20%
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6 Due to the different that Alistair is having in understanding the investment theones he sdks if you can recommend any alternative and move easily understood ways in which be can keep up-to-date with the performance of his share
(1)State two investment theones that Alistair may firah useful in keeping up-to-date
Newspaper: the Financial Times is the most widely financial newspaper in the UK. It prints daily prices and movements. The economist and Business Week are also excellent source of information about sectors in general and individual companies.
Reuters and Bloomberg.
Specialist Analysts: the City of London employs hundreds of full-time analysts to analyze companies in detail and make stock recommendations to professional investors.
7 Alistair’s brother Peter is still trying to convince Alistair of merits of investing in overseas. Alistair remains cautious about such a venture but asks you to summaries for him main benefits and drawbacks of such an investment
Advantage and disadvantage of overseas investment
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Advantage:
Diversification:
Choosing a wider range of investments reduces the risk of an individual investment.
More choice:
Investors could have the chance to invest in higher growth areas, especially in developing markets where there are more high growth opportunities.
Currency:
If the currency you are investing in appreciates, then you will achieve the additional gain from this as well as the underlying.
Disadvantage:
1. Individual investors lack the expertise to choose and monitor investments overseas.
2. Accounting policies and requirements differ across nations. There are attempts to try to standardize accounting and reporting measures.
3. as previously discussed, currency can be a double edged sword and can be
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an additional risk for the investor.
4. The transactions costs can be more expensive to deal in foreign shares.
5. Because of the governments are potentially less stable. It can cause problems for investors in term of getting access to the capital they have invested.
8 Despite having spoken to Financial Adviser appointed by his employer Alistair is still unsure of the features of the company Pension Scheme Summarise the main features of this scheme
Stakeholder pensions are mainly aimed at those who do not have access to a good company pension scheme.
Eligibility for all employees working for employers with five or more
Can contribute from ￡20 regular or one-off
Charges must be no more than 1.5% year for the first ten years and 1% a year thereafter
Transfer to another pension’s scheme or on stopping contribution without penalty
Up to 10% of the premium can use for life assurance
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At retirement, the option exists to take a quarter of the fund as a tax-free amount
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