Unit 15 - Cash flow management devolved assesment

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Has any one recently done the cash flow management devolved assement. I did mine the other week and couldn't even attempt task three was which all about Gilts. I have since looked up information on Gilts and have re-read the task but I still don't understand what they are asking me to do or what sort of answer I should give.<BR><BR>If there is any one who could help me on this task, I would be very grateful.<BR><BR>Thank you<BR><BR>K

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    Unit 15 - Cash flow management devolved assesment

    kmp<BR>Can you recall what the question asked to do with gilts?<BR>Do you understand what gilts are, who issues them and the way that they can be bought and sold?<BR><BR>Sandy
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Unit 15 - Cash flow management devolved assesment

    The question asked about the possible changes in base rates on the companies short term investment strategy.<BR><BR>The company actually put £100,000 into a deposit account for four months with interest of 3% pa.<BR><BR>But the question also provided the following information:<BR><BR>Treasury stock 7% 2005 may be purchased at £110.<BR>Flat yield : 6.36%<BR>Redempton: 3.8%<BR><BR>I think the question is asking you to work out whether investing into a gilt would have been more benefical to the company than putting it into the bank which they actually did. But I'm not quite sure. I have looked up information from the text book and course notes given to me but I haven't found a question like this before.<BR><BR>Cheers<BR><BR>Kells
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Unit 15 - Cash flow management devolved assesment

    I am experiencing difficulties in finding past papers and questions to revise from and am due to take this simulation soon.<BR>Any tips of areas to concentrate on would be apreciated ?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Unit 15 - Cash flow management devolved assesment

    Flat rate 6.3%: If you divide 7 by 110 you get this rate, i.e. a real rate. The interest is always paid as based on the face value.<BR><BR>The redemption yiels is calculated by doing a discounted cash flow followed by a 'hurdle rate exercise. That is, you buy at 110, get 7 per year for x years then get 100 on redemption.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Unit 15 - Cash flow management devolved assesment

    Treasury stock can be issued by the government at £100 each. These are tradable, so if you had bought your stock from the government when they were issued, rather than wait until 2005 to sell them back, you could sell them to me.<BR><BR>But how much will you get if you sell them?<BR><i>The formula for this is beyond the AAT syllabus, but does have a lot in common with net present values from Intermediate ECR</i><BR>At 7% whoever buys the stock is buying the entitlement to £7 every year.<BR><i> we will not look at whether it is once a year or not â?? just assume it is one payment of £7 (7% of £100) for every stock held</i><BR><BR>To work out the flat yield you look at the value of all the future interest payments of £7 and compare this with the investment cost.<BR>- in this case the £110 re-sale value of the stock will generate a return of 6.36%<BR><BR>To work out the redemption yield you look at all the money that you will get back and discount the receipts to their present values: the £100 from the government as well as the interest payments. So because it is currently trading at £110 the redemption yield works out lower than the flat yield (but this is more accurate)<BR><BR>I hope that gives you an idea of what you are looking at with gilts.<BR><BR>Now if you compare buying stocks at £110 with a 7% interest payment each year and a reimbursement of £100 at the end of 2005 with putting the money in the bank, there is a direct comparison. The stock will generate 3.8% if held until redemption, whereas the bank deposit will only generate 3%.<BR><BR>I donâ??t think the question requires any figures, but Iâ??ve put some in to try to help.<BR><BR>Imagine that today is 1st Jan 2003 and we have £100,000<BR><BR>We can deposit this in the bank and receive £3,000 on 31 Dec 2003, another £3,000 on 31 December 2004 and another £3,000 on 31 December 2005. Plus we will get our £100,000 back on 31 December 2005.<BR><BR>Or we can buy treasury stock (second hand) at £110 for every £100 stock.<BR>If so we would probably buy 909 at £110 each. This would generate an income of £6,363 on the 31 December each year and we would get (909 x £100) £90,900 back on 31 December 2005.<BR><BR>Why is the current price of the stock £110 when it was issued at £100?<BR><BR>The interest on this gilt is fixed. So once £7 per £100 (7%) has been set it cannot change.<BR>This means that the holder of the bond could have a higher return than the market rate. Interest rates can go up and down in the market..<BR>If the market rate is 6%, then a guaranteed income of £7 per year would cost £110. In other words anyone wanting to earn £7 interest would have to put £110 into an account paying 6%.<BR><BR>This means that if you hold government stock paying £7 it is worth £110 and you can sell it for £110 even if it had originally cost you £110. <BR><BR>I know this is quite a long reply. Please let me know if you would like any part made clearer.<BR><BR>Sandy<BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Unit 15 - Cash flow management devolved assesment

    Thank you very much for help.<BR><BR>Its made it a lot clearer now.<BR><BR>Kells

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