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Developed by Jikku Joseph for BUS213F in 2004 using University of Cape Town Actuarial Science I Financial Mathematics Lecture

Notes (Chapter 10 by Rob Dorrington)

Investments
Investment
Government Bills/ Treasury Bills: short term securities issued by govt to fund short term spending requirements

Security
Safest short term investment; Very secure; low volatility; backed by government; Safest long term investment (income and capital security) more volatile than short term investments

Yield

Expenses/Exchange Rates

Marketability
Very marketable

Tax
Taxed as income tax

Gilts/Gilt Stocks/ Fixed Interest Government Bonds: government raise money by floating loan on the stock exchange

Index linked stocks

Similar to fixed interest stocks govt backed; secure in real terms;

Corporate Debt

Debentures: part of loan capital or long term borrowings of company

Unsecured loan stock Eurobonds: bonds which pay regular interest payments and a final capital repayment at par. Issued in currency other than countries in which traded. Certificated of deposit

Less secure; dependent on term, type of bond and the company issuing the bond Depends on the companys performance; rank above other debt on default; depends on extent of capital cover company has; Lower than debentures; rank alongside regular creditors; depends on capital cover company has; Depends on borrower; exchange rate risk;

Government Borrowings Depends on monetary policy; in Cheapest to trade and very easy to general lower than other short term trade investments done locally no exchange risk otherwise exchange risk Dealt in large quantities Change of interest rates over time changes returns; only nominal low costs return; relatively low due to security and marketability but compensated by low dealing costs volatile nature may lead to being linked to index (insecure during time lag) Interest and capital payments take Low into account change in value of money time lags lower since no inflation risk Borrowings by other bodies Offer a yield margin over and above govt bonds Low marketability and higher risk => yield is higher Quite high sale very much commission based

Excellent

depends on country

Poor in South Africa but generally good

Less marketable due to small issues Less marketable than gilts

Poor security and marketability => higher yield

Lower than debentures or corporate debt

Lower/same as unsecured loan stocks

Depends on size of issue

Depends on issuing bank;

Depends on issuing bank

Developed by Jikku Joseph for BUS213F in 2004 using University of Cape Town Actuarial Science I Financial Mathematics Lecture Notes (Chapter 10 by Rob Dorrington)

Ordinary Shares: issued by commercial undertakings and other bodies which entitle the holders to receive all net profits of the company after interest on loans and fixed interest stocks have been paid

Preference share: forms part of capital and lees common but offer a fixed stream of income which is fixed and promised and must be pd before ordinary dividends are pd out Convertible Loan Stocks: option to switch for equity if not pd out at maturity

Lowest ranking of all company finance; less secure than all forms of capital; no security on dividend income (pd at discretion) ; depends on company performance secure in inflationary terms; very volatile (long term) since affected by wide range of political, economic and social conditions; Poor. Better than ordinary shares (fixed promised dividend has to be pd before ord dividends) but worse than loan stocks

Shares and other equity type borrowing Expected overall return higher Usually high than other securities due to risk of default, volatility and variability of returns; made up of dividends and growth of share value

Vary. Blue Chip (very marketable) to Gamma (less marketable) to Unlisted stocks (poor marketability)

Taxed on income

Lower than equity (ordinary shares) since more marketable and less risk (more certain pmts and rank higher on winding up

Poor usually bought and held for strategic purposes

Property

More secure than unsecured loan stock since option to convert maturity proceeds to equity hence some inflation security Real growth rate income not guaranteed varies with demand and supply

Greater than gilt but lower than unsecured loan stock

Pretty high. real growth rate and higher running yield (rent/price) than equities

High maintenance and buying/selling expenses

Poor. Few transactions take place which are lengthy and costly to complete. Also property is unique by nature

Capital gains tax on maturity if cash option taken and not conversion. Income and capital gains tax. Some tax incentives in rural development.

Convertible Security: loan stocks or preference shares that convert into ordinary shares of the company.

Cross between fixed interest stocks and equity; Lower risk of debt security; As approaches date behaviour becomes closer to security which converts to

Higher income than ordinary shares but lower income than conventional loan stocks or preference shares. Lower running yield than on normal loan stock or preference share.