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What is the main risk associated with debentures?
What is the main risk associated with debentures?
Debenture holders have a preferential claim to the company's assets in case of liquidation.
Debenture holders have a preferential claim to the company's assets in case of liquidation.
False
What type of debenture is repayable on a predetermined date?
What type of debenture is repayable on a predetermined date?
Redeemable debenture
An __________ debenture lasts indefinitely and is never repaid by the company.
An __________ debenture lasts indefinitely and is never repaid by the company.
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If a company is perceived to be high risk, what must it offer to attract debenture buyers?
If a company is perceived to be high risk, what must it offer to attract debenture buyers?
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Match the types of debentures with their features:
Match the types of debentures with their features:
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Debenture holders receive the same returns as shareholders.
Debenture holders receive the same returns as shareholders.
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What is one key disadvantage of debenture investments regarding inflation?
What is one key disadvantage of debenture investments regarding inflation?
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What is the primary purpose of a retirement annuity (RA)?
What is the primary purpose of a retirement annuity (RA)?
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Pension funds allow employees to pool their contributions to achieve greater investment growth.
Pension funds allow employees to pool their contributions to achieve greater investment growth.
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What happens to contributions made to pension funds in terms of taxable income?
What happens to contributions made to pension funds in terms of taxable income?
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A retirement annuity pays out in the form of a __________ and a monthly income.
A retirement annuity pays out in the form of a __________ and a monthly income.
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What does the risk associated with a retirement annuity (RA) or pension fund depend on?
What does the risk associated with a retirement annuity (RA) or pension fund depend on?
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Individuals should spend all the money accumulated in a previous pension fund instead of reinvesting it.
Individuals should spend all the money accumulated in a previous pension fund instead of reinvesting it.
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Match the following terms with their descriptions:
Match the following terms with their descriptions:
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People often wait too long to make provisions for their __________.
People often wait too long to make provisions for their __________.
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What type of fund invests all funds in shares?
What type of fund invests all funds in shares?
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Investing in collectibles does not require a high level of knowledge and expertise.
Investing in collectibles does not require a high level of knowledge and expertise.
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In how many years should a good Unit trust investment ideally outperform inflation?
In how many years should a good Unit trust investment ideally outperform inflation?
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A portfolio in a foreign country may be established due to South Africa's exchange control mechanisms that limit the amount of money that may be taken out each year. This type of investment can be considered __________.
A portfolio in a foreign country may be established due to South Africa's exchange control mechanisms that limit the amount of money that may be taken out each year. This type of investment can be considered __________.
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Match the types of investment options with their characteristics:
Match the types of investment options with their characteristics:
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Which of the following is NOT an example of collectibles?
Which of the following is NOT an example of collectibles?
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The markets for true collectibles are very volatile.
The markets for true collectibles are very volatile.
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What is a common time frame for investing in Unit trusts?
What is a common time frame for investing in Unit trusts?
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What is a common factor that reduces the ROI of financial instruments like pension funds and retirement annuities (RAs)?
What is a common factor that reduces the ROI of financial instruments like pension funds and retirement annuities (RAs)?
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Endowments can only be funded through lump sum investments.
Endowments can only be funded through lump sum investments.
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What is the typical time frame for an endowment policy to mature?
What is the typical time frame for an endowment policy to mature?
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The investor can choose a risk profile for their investment, ranging from high risk in an equity fund to a _____ risk.
The investor can choose a risk profile for their investment, ranging from high risk in an equity fund to a _____ risk.
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Match the following investment types with their characteristics:
Match the following investment types with their characteristics:
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What happens if an endowment policyholder becomes disabled?
What happens if an endowment policyholder becomes disabled?
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Offshore investments provide the opportunity to invest in assets that may not exist in South Africa.
Offshore investments provide the opportunity to invest in assets that may not exist in South Africa.
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What is one potential benefit of investing offshore?
What is one potential benefit of investing offshore?
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What is a fixed deposit?
What is a fixed deposit?
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Investing in a fixed deposit carries a high risk of losing money.
Investing in a fixed deposit carries a high risk of losing money.
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What happens if an investor withdraws funds from a fixed deposit before the maturity date?
What happens if an investor withdraws funds from a fixed deposit before the maturity date?
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A money market account typically has a __________ time frame.
A money market account typically has a __________ time frame.
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Which statement is true about money market accounts?
Which statement is true about money market accounts?
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Match the following investment types with their characteristics:
Match the following investment types with their characteristics:
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The longer the investment time frame for fixed deposits, the lower the interest rate offered.
The longer the investment time frame for fixed deposits, the lower the interest rate offered.
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What is a characteristic of a 32-day call account?
What is a characteristic of a 32-day call account?
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Study Notes
Debentures
- Debentures are a type of debt security issued by companies to raise capital.
- Debenture holders receive interest on their investment, which is paid by the company issuing the debenture.
- The interest rate offered on debentures is determined by the company's creditworthiness and the perceived risk associated with the business.
- Debenture holders can sell their debentures on the Johannesburg Stock Exchange (JSE) to other interested parties.
Types of Debentures
- Redeemable Debentures: The company repays the principal amount of the debenture on a pre-determined date.
- Irredeemable Debentures: The company never repays the principal amount. Debenture holders continue to receive interest indefinitely.
- Convertible Debentures: These debentures can be converted into shares of the company at a pre-determined future date.
Debenture Risks
- Debentures are unsecured financial instruments, meaning they do not have a claim on specific assets of the company.
- If the company goes bankrupt, debenture holders have a lower priority than creditors in receiving their money.
- The risk associated with debentures depends on the company's financial strength and the inherent risks of the business activities.
- Debenture holders face a higher risk than investors in bank deposits but a lower risk than equity investors.
Debenture Return on Investment (ROI)
- Companies are legally obligated to pay interest on debentures, which potentially offers a higher return than equity investments.
- Debenture holders do not benefit from capital gains, only a steady stream of interest payments.
- As debentures are unsecured, companies typically offer higher interest rates to compensate investors for the added risk.
- Interest income on debentures is taxable, which can reduce the overall return on investment.
Debenture Time Frame
- Debentures are typically issued as long-term financial instruments, providing interest income until redemption.
Retirement Annuities (RAs)
- Retirement annuities (RAs) are insurance policies designed to provide income to individuals upon reaching the age of 55.
- They involve monthly premium payments, with a lump sum payout at maturity along with a monthly income stream.
- The payouts depend on the premium amount and the duration of the contribution period.
- RA premium payments are tax-deductible, encouraging individuals to save for their retirement.
Pension Funds
- Pension funds are established when employees contribute to a pooled fund, managed by a pension fund administrator.
- The administrator invests the funds with the aim of generating returns that outpace inflation.
- When employees retire, they receive a monthly pension from the fund.
- Pension fund contributions are deducted from salaries before taxes are calculated, incentivizing individuals to save for retirement.
Risks Associated with RAs and Pension Funds
- The risk associated with both RAs and pension funds depends on the investment strategy employed by the administrator.
- Both instruments are valuable tools for securing retirement income.
Key Considerations for Retirement Planning
- Individuals should start saving for retirement early in their careers.
- Due to increased life expectancies, individuals need to plan for a longer retirement period and potential expenses.
- It is essential to consider the loss of benefits during retirement.
- When switching jobs, individuals should reinvest their pension fund payout into the new employer's pension fund to avoid losing accumulated benefits.
ROI for RAs and Pension Funds
- The return on investment is determined by the skilled administration of the investment manager.
- While some RAs and pension funds guarantee specific returns, these must be compared to the current inflation rate.
- Administrative costs and management fees can impact the ultimate rate of return.
Time Frame for Retirement Planning
- Saving for retirement should start early and continue throughout the employee's earning years. Individuals should aim for at least 40 to 45 years of consistent contributions.
Endowments
- Endowments are long-term savings plans that can be funded with a lump sum or through monthly contributions.
- Upon policy maturity (typically 5 to 10 years), the investor receives the full amount or, in case of death, the beneficiary receives the investment immediately.
Endowment Risks
- Investors can choose a risk profile for their endowment ranging from high-risk (equity-based) to lower-risk (balanced investments).
- Some insurers offer Contribution Waiver options to cover monthly payments in the event of serious illness or disability.
ROI for Endowments
- The return on investment depends on the chosen risk profile.
- Management and administrative fees reduce the overall ROI.
Endowment Time Frame
- Endowments are intended for long-term savings, typically spanning 5 to 10 years.
Offshore Investments
- Offshore investments offer opportunities for diversification across various countries.
Risks of Offshore Investments
- Risks are spread across different countries, with developed economies often regarded as more stable than emerging markets.
ROI for Offshore Investments
- Fluctuations in exchange rates can impact the attractiveness of investing in another currency.
- Offshore markets may provide investment opportunities not available in South Africa.
- Individuals planning on emigrating may consider establishing an investment portfolio in their destination country.
- South Africa's exchange control limits the amount of money that can be taken abroad annually.
Time Frame for Offshore Investments
- The only time constraint is the yearly limit set by South Africa's exchange control regulations.
- Offshore investments can be used for both short-term and long-term strategies
Unit Trusts
- Unit trusts are essentially baskets of shares traded on the stock exchange.
- Investors can choose a risk profile that aligns with their tolerance level.
- Each unit trust is managed by a fund manager who oversees investments.
- Unit trusts can be diversified across industries and companies on the JSE or within specific sectors.
- Investors decide how to allocate their funds - lump sum, monthly contributions or a combination of both.
Risks of Unit Trusts
- Risk profiles vary greatly depending on the chosen fund. Options range from high-risk equity funds to more stable, diversified funds with allocations to equities, international markets, and money market instruments.
ROI for Unit Trusts
- Over the medium term (3 to 5 years), unit trusts aim to outperform inflation.
Time Frame for Unit Trusts
- Unit trusts are generally considered medium to long-term investments.
Collectibles
- Collectibles include antiques, coins, artwork, stamps, jewelry, and Kruger Rands.
Risks of Collectibles
- The South African collectables market is relatively small compared to international markets, but technology is bridging this gap.
- Trading collectibles requires a high level of knowledge and expertise.
ROI for Collectibles
- The value of genuine collectibles tends to increase over time, assuming they are properly maintained.
Time Frame for Collectibles
- Collectibles markets are not highly volatile, showing gradual growth over a long period.
Notice Deposits (Fixed Deposits)
- Fixed deposits involve investing a fixed amount of money for a specific period at a fixed or variable interest rate.
- Funds can only be withdrawn upon maturity or the investor's death. Early withdrawal incurs penalties.
Risks of Fixed Deposits
- Bank deposits generally carry a low risk of loss.
- The main risk lies in the possibility of the bank being liquidated. This event is rare, but the African Bank Curatorship in 2014 demonstrates that even bank deposits are not entirely risk-free.
ROI for Fixed Deposits
- The interest rate for fixed deposits varies across banks and depends on the investment amount.
- Longer timeframes and larger investment amounts typically correspond with higher interest rates.
- Capital growth can be achieved by reinvesting interest payments, resulting in cumulative interest on both the principal and accrued interest.
Time Frame for Fixed Deposits
- Fixed deposit terms range from one to 10 years, or even longer.
- Longer investment durations generally yield higher interest rates.
Money Market Accounts
- Money market accounts are short-term investments, often popular due to their liquidity.
- They facilitate easy access to funds, with options like call accounts offering indefinite investment periods.
- The investor only needs to provide notice before withdrawing funds—for example, a 32-day call account requires 32 days' notice.
Risks of Money Market Accounts
- Money market accounts are low-risk investments, but they offer lower interest rates than long-term options.
ROI for Money Market Accounts
- Interest rates on money market accounts typically surpass those of traditional savings accounts. This makes them attractive for short-term investments.
Time Frame for Money Market Accounts
- Money market accounts are short-term investments, ranging from a month to a year in duration.
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Description
Learn about debentures, a crucial financial instrument used by companies to raise capital. This quiz covers types of debentures, risks involved, and the benefits for debenture holders. Test your knowledge on redeemable, irredeemable, and convertible debentures.
