Brand mock Q's (1)

Question 1

If the real exchange rate of a country’s currency against another country’s currency has risen, this is likely to mean:

A. there will be increased demand for domestic goods.
B. domestic goods become more expensive relative to foreign goods.
C. the country will consider leaving the exchange rate mechanism.
D. both governments will consider fixing the exchange rate.

Answer 1

B

The real exchange rate measures the price of domestically produced goods relative to the price of overseas goods, taking account of the exchange rate. Where the real exchange rate rises, a country’s goods become more expensive relative to foreign ones, negatively impacting domestic production. Where the real exchange rate falls, domestic goods become relatively cheaper and so demand increases.

Question 2

Alex has bought a structured product which is offering a return of 110% of the FTSE 100 or a full return of his capital if the index is lower at the redemption date. This is known as:

A. absolute return.
B. hard protection.
C. kick-out return.
D. soft protection.

Answer 2

B

Some structured products give ‘hard protection’, in which case a given return is guaranteed or a full return of capital if the index is lower at redemption.

Question 3

Rose holds the following securities

Security, Beta
A, 1.4
B, 0.7
C, 2.0
D, 1.2

If the risk-free rate is 2% and the expected market return is 6%, we can say that:

A. security A is the most sensitive to market movements.
B. security B has an expected return of 5.8%.
C. security C has an expected return of 10%.
D. security D has the best-risk adjusted return.

Answer 3

C

The capital asset pricing model calculates the expected return on a security as the risk-free rate + (beta x (market return - risk-free rate)). For security C, this would work out as 2 + (2 x (6 - 2)), = 10%. The same equation would give 4.8% for security B. Security C would be the most sensitive, based on its high beta. The information provided would not be sufficient to draw conclusions about risk-adjusted returns.

Question 4

Which of the following should an investor mainly be aware of when considering direct investment in equities? (Tick all that apply.)

A. Share dividend volatility.
B. Liquidity risk.
C. Counterparty risk.
D. Ratings from credit rating agencies.

Answer 4

A, B

Investing in shares carries risk; dividends may not always be paid and depending on the company, the shares may be hard to sell.

Question 5

How does the pragmatic approach to asset allocation differ from Modern Portfolio Theory?

A. Modern portfolio theory uses diversification to reduce risk.
B. Modern portfolio theory is concerned with the interaction of different asset classes.
C. Pragmatists use forward-looking judgements of likely returns and volatility to determine portfolio weightings.
D. Pragmatists use asset allocation as a defensive strategy to preserve capital.

Answer 5

C

Modern Portfolio Theory uses mathematical analysis to construct optimum portfolios, taking into consideration historic return rates and volatility of investments. Pragmatists also use forward-looking judgements of likely returns and volatility when considering asset allocation. Within both methods, diversification of asset classes and correlation between assets are used to create risk-adjusted portfolios.

Question 6

Harry has recently received a client agreement from his adviser. The purpose of this agreement is to ensure Harry understands things such as the:

A. service that will be provided and review frequency.
B. the adviser’s investment process.
C. administration process for client actions.
D. the risk profile of top performing funds.

Answer 6

A

The purpose of a client agreement is to ensure the client understands things such as the service that will be provided and the frequency of reviews.

Question 7

If a bank is on the brink of failure and, as a consequence, the depositors suffer a loss on their holdings, this is known as:

A. downgrade risk.
B. bail-in risk.
C. currency risk.
D. systematic risk.

Answer 7

B

Bail-in is where financial help comes from the existing shareholders, bondholders and depositors. This can be compared with a bail-out where it is a government or central bank that bails out a financial institution in difficulty.

Question 8

Your client has specified that their return objective is ‘capital appreciation’. A typical characteristic for this type of client is

A. risk aversion.
B. a short timescale.
C. growth is usually achieved from capital gains.
D. they are dependent on increasing income.

Answer 8

C

Capital appreciation’ is the growth, in real terms, from assets usually achieved from capital gains.

Question 9

Patrick has been advised by his financial adviser to use a tracker fund for his core holdings in order to:

A. meet short-term tactical objectives.
B. maintain the risk and return in line with market average.
C. achieve superior performance through active selection.
D. attempt to beat the benchmark.

Answer 9

B

An adviser might use a tracker fund for core holdings to maintain the risk and return in line with market averages. Tracker funds are not generally used to meet short-term tactical objectives and a tracker fund will aim for returns in line with a particular benchmark/index rather than attempting to outperform it.

Question 10

Where a homeowner wishes to let out a room to a tenant, it is true to say that

A. rent-a-room relief will only apply to self-contained accommodation.
B. rent-a room relief can only be claimed where annual rent is less than £7,500.
C. the unit must not be unfurnished for rent-a-room relief to apply.
D. spouses/civil partners can claim a tax exempt amount each.

Answer 10

C

Rent a room relief does not apply where the accommodation is either unfurnished or self-contained. There is only one exempt amount per residence. Rent-a-room relief can still be claimed where the annual rent exceeds £7,500, however, tax will be paid on the excess and deduction of expenses will not be allowed.

Question 11

The calculation of prices within a unit trust, both for sale by the managers to the public and for repurchase by the managers from the public, is monitored by the

A. trustees.
B. unit trust manager.
C. independent depositary.
D. authorised corporate director.

Answer 11

A

The trustees monitor the calculation of unit prices within a unit trust.

Question 12

What characteristic would you associate with fixed interest securities?

A. Fixed redemption value.
B. High risk.
C. Variable rate of interest.
D. Negotiable long-terms.

Answer 12

A

Fixed Interest securities have a fixed redemption value (par value). They also have a fixed rate of interest and maturity date. They are generally deemed to be low to medium risk investments depending on the type of fixed interest security invested in.

Question 13

A client is considering investing in an offshore bank account. Which of the following is regarded as a common danger specific to investing in offshore accounts?

A. Reduced compensation schemes.
B. Interest rate risk.
C. Higher taxation rates.
D. Reinvestment risk.

Answer 13

A

Offshore accounts may offer less compensation to an investor, if the institution defaults on its obligations, than that available in the UK under the Financial Services Compensation Scheme

Question 14

Pierre has invested in an open-ended investment company (OEIC). In respect of his holdings, which of the following is incorrect?

A. The fund will be managed by an Authorised Corporate Director (ACD).
B. Its assets must be held with a depositary which is part of the same group.
C. The OEIC may contain sub-funds with differing investment objectives.
D. Different shares classes may be issued with different charging structures.

Answer 14

B

The funds are required to be held with a depositary, which is required to be independent as opposed to part of the same group. All of the other options are correct.

Question 15

Gerard invests a sum of £30,000 into a fixed rate bond paying 3% compound interest for two years. He then reinvests the proceeds into a unit trust which grows at 6% per annum for five years. How much money does he have at the end of the seven years?

A. £40,687.42
B. £42,591.71
C. £43,402.91
D. £45,076.38

Answer 15

B

£30,000 invested at 3% per annum for two years would give a total of £30,000 x 1.032, or £31,827. Reinvesting this at 6% for 5 years would give a total return of £31,827 x 1.065, or £42,591.71.

Question 16

Justin holds a venture capital trust (VCT) and a seed enterprise investment scheme (SEIS). Of these two investments

A. the SEIS benefits from a higher rate of Income Tax relief.
B. only the VCT gains are liable to Capital Gains Tax.
C. the SEIS has the higher maximum investment.
D. the VCT has a shorter minimum holding period to retain Income Tax relief.

Answer 16

A

A SEIS offers Income Tax relief at 50% on the initial investment and has a minimum holding period of three years, as opposed to a VCT which offers 30% and requires the holding to be retained for five years. VCT gains are not subject to CGT. The maximum permitted investment into a VCT is £200,000 per tax year. This is the same amount as can be invested in a SEIS per tax year.

Question 17

Neil is invested in fixed interest investments and is keen to understand yield curves. What might cause an Inverted Yield curve

A. Short-term bonds have a lower yield than that available on long-term bonds.
B. Investors expect interest rates to fall in the short-term.
C. High degrees of pessimism over future inflation rates.
D. Long-term interest rates expected to increase.

Answer 17

B

An inverted yield curve might indicate that investors believe interest rates will fall in the short term and will reduce over the longer term, which results in lower yields for longer dated bonds.

Question 18

Kim is considering the purchase of an investment trust ISA or a unit trust ISA. In comparing them, she should be aware that

A. investment trust ISAs provide a much broad spread of holdings for relatively small investment.
B. the ISA structure allows the unit trust manager to receive interests from corporate bonds without any tax being deducted.
C. unit trust ISAs are eligible to invest in any UK UCITS scheme recognised by the FCA.
D. investment trust ISAs generally have a smaller investment choice.

Answer 18

D

The choice of investment trust ISAs is smaller than the choice of unit trust ISAs.

Question 19

The Fama and French multi-factor model found that generally the tendency is for

A. growth stocks to outperform value stocks and large cap to outperform small cap stocks.
B. growth stocks to outperform value stocks and small cap to outperform large cap stocks.
C. value stocks to outperform growth stocks and large cap to outperform small cap stocks.
D. value stocks to outperform growth stocks and small cap to outperform large cap stocks.

Answer 19

D

Fama and French found that value stocks tended to outperform growth stocks and small cap stocks tended to perform better than large cap stocks .

Question 20

The Capital Asset Pricing Model (CAPM) provides the relationship between a security’s systematic risk and its expected return so that

A. securities with a low beta would provide the highest returns.
B. securities with high beta can be expected to provide a higher return.
C. non-systematic risk can be eliminated through diversification.
D. the risk premium can be determined.

Answer 20

B

The CAPM helps to calculate the relationship between systematic investment risk and expected return. According to CAPM a company with a high beta can be expected to provide a higher return.

Question 21

Jake’s investment manager has explained to him that he uses a top-down strategy when it comes to putting together an investment portfolio. This means that Jake’s investment manager (Tick all that apply.)

A. believes that performance comes first from asset allocation.
B. only allocates to geographical areas once asset allocation has been determined.
C. will actively seek to invest in companies that have long-term sustainable advantage.
D. relies on stock picking skills to deliver good performance.

Answer 21

A, B

A top-down strategy for portfolio construction works on the belief that performance will come first and foremost from asset allocation. Once asset allocation is established, the fund manager then picks geographical areas, sector distribution then follows. Stock picking is usually the last part of the process.

Question 22

Harriet has £10,000 and borrows £5,000 to buy shares. The purchase price of the shares is £3, and she goes on to sell them for £3.80. What percentage gain has she made on her original capital?

A. 100%.
B. 40%.
C. 30%.
D. 10%.

Answer 22

B

Harriet has made a profit of £4,000 - this is 5,000 shares x £3.8 = £19,000 - £15.000 = £4,000 which is a gain of 40% on her original investment of £10,000

Question 23

Below is a comparison of the asset allocation of Petra’s portfolio with its benchmark along with the performance figures

(1) Asset (2) Benchmark AA (3) Manager AA (4) Performance

UK shares / 45% / 50% / 12.5%
US shares / 25% / 30% / 15%
Fixed interest / 25% / 15% / 7%
Deposits / 5% / 5% / 3%

From this information we can say that (Tick all that apply.)

A. the return on UK shares in Petra’s portfolio is 6.25%.
B. the fund manager is overweight in US shares.
C. the benchmark has outperformed Petra’s fund.
D. the fund manager has outperformed the benchmark.

Answer 23

A, B, D

To compare the benchmark performance with the fund performance in terms of the asset allocation, we calculate the total contribution of each asset class (the index performance x the asset allocation).

To compare the benchmark performance with the fund performance in terms of the asset allocation, we calculate the total contribution of each asset class (the index performance x the asset allocation)

Question 24

Which of the following are considered to be the main drawbacks of residential property investment? (Tick all that apply.)

A. Regional variations in house prices
B. Competition
C. Liquidity
D. Void periods

Answer 24

C, D

Drawbacks of property investment include liquidity (it can be difficult to sell property quickly) and there can be void periods where there is no rental income, because there is no tenant or the tenant has failed to pay the rent. Another drawback is the on-going management costs which can be as high as 10 to 15%

Question 25

Maura invests a sum of £1,000 on an annual basis for a period of ten years at a rate of return of 3%. How much money does she have at the end of the period? A. £11,463.88 B. £11,732.91 C. £12,018.73 D. £12,218.54

Answer 25

A ## Footnote The value of future cashflows can be worked out using the formula FV = P x [((1 + r)n) - 1] / r, where r is the return and n is the compounding period. In this instance, this simplifies to £1,000 x [(1.0310) - 1] / 0.03. This gives £11,463.88.

Question 26

When comparing the differences between an open-ended investment company (OEIC) and a unit trust, it is true to say that an OEIC (Tick all that apply.) A. issues annual audited accounts. B. may be a stand-alone fund or an umbrella company. C. can meet the costs of creation from the fund. D. does not require an independent depositary.

Answer 26

A, B, C ## Footnote An OEIC issues annual audited accounts compared to a unit trust that issues reports annually and half yearly. An OEIC may be a stand-alone fund or an umbrella company, and it can meet the costs of creation from the fund, unlike a unit trust. An OEIC requires an independent depositary to safeguard assets; whereas a unit trust has a trustee.

Question 27

Which one of these terms describes how a gilt could be classified based on its time until redemption? A. Mid-term. B. Mediums. C. Index-linked. D. Average term.

Answer 27

B ## Footnote Gilts are classified as shorts, mediums or longs depending on their time to redemption.

Question 28

Why might an offshore investment bond be preferable for a UK investor instead of them investing directly into offshore funds? (Tick all that apply.) A. To take advantage of the more favourable income tax regime on gains B. Where the investor is looking to place the investment in trust C. Where a 5% tax deferred withdrawal is required D. To avoid withholding tax

Answer 28

B, C ## Footnote It is generally easier to place an offshore investment bond rather than offshore funds into trust, and with an offshore bond, an investor can utilise the 5% tax deferred withdrawal facility. Answer (a) is incorrect as the income tax regime applicable to gains from offshore bonds is generally less favourable than the CGT regime for offshore funds. Answer (d) is also incorrect as offshore bonds are potentially liable to withholding tax on investment income.

Question 29

Which of the following are the main differences between the FTSE All-Share and the FTSE 100? (Tick all that apply.) A. The FTSE100 is calculated in real-time. B. The FTSE All-Share is rebalanced annually. C. The FTSE All-Share is based on market capitalisation. D. Moving out of the FTSE100 may have a big impact on a company’s share value.

Answer 29

B, D ## Footnote The FTSE All Share is rebalanced annually whilst the FTSE 100 is rebalanced quarterly. Moving in and out of the FTSE 100 will have a significant impact on a company’s share price not least because of the demand from index tracker funds tracking the FTSE 100. Both are calculated in real-time and based on market capitalisation.

Question 30

Price / EPS Share A 210p / 29p Share B 190p / 23p These two company shares sit in the same sector. From the information given we can make the general comment that A. share A is overpriced. B. share B is under-priced. C. share A will provide better returns than B. D. share B is expected to grow more than Share A.

Answer 30

D ## Footnote Price earnings ratio (P/E ratio) is calculated by dividing the share price by the earnings per share. The higher the P/E ratio, generally, the more highly the company is rated and expected to grow. The formula for calculating the P/E ratio = market price/earnings per share. So, share A’s P/E ratio = 7.24 (210/29) and Share B’s P/E ratio = 8.26 (190/23). As share B has a higher P/E ratio to Share A, the general expectation would be that it will grow more than share A; hence, the answer is (d).

Question 31

Hayden is considering investing in options. He should be aware that (Tick all that apply.) A. he will pay a premium when buying but he will not pay margin payments. B. the seller deposits an initial margin payment upon writing an option. C. he will be obliged to buy or sell the specified asset at the fixed price. D. there will be no value to the option as it cannot be traded at any point.

Answer 31

A, B ## Footnote An option gives the buyer the right, but not the obligation, to buy or sell an asset at a fixed price before or on a fixed date in the future. The buyer pays a premium but does not make margin payments. The seller (or writer) receives the premium and makes margin payments.

Question 32

Paul and Mary are married with two children, aged 16 and 18. How much can they invest in total in ISAs in this tax year? A. £60,000 B. £80,000 C. £84,368 D. £89,000

Answer 32

D ## Footnote The ISA limit for an adult (aged 18 and over) is £20,000, and the limit for a junior ISA (under 18) is £9,000. 16- and 17-year-olds can open a cash ISA with a limit of £20,000 in addition to their junior ISA. Paul, Mary and their 18-year-old child can invest £20,000 each = £60,000 and their 16-year-old child can invest £9,000 into a junior ISA and £20,000 into a Cash ISA. Therefore, the total amount that can be invested by the family is £89,000.

Question 33

You are a financial adviser conducting a fact-find with a new client. Which of the following would be regarded as a ‘hard’ fact? A. Income and debt. B. Attitude to risk. C. Ethical views. D. Family values.

Answer 33

A ## Footnote When completing a fact-find, an adviser must gather ‘hard’ and ‘soft’ facts. Soft facts help to establish a client’s opinions and goals and include attitude to risk. Hard facts are factual information such as age, income and any debt.

Question 34

Which of the following can be described as the UK’s main equity indices? (Tick all that apply.) A. FTSE 250. B. FTSE 350. C. FTSE All-share. D. FTSE Actuaries Gilts.

Answer 34

A, B, C ## Footnote Among the main UK indices are the FTSE 350, the FTSE Fledgling and the FTSE All-Share. The FTSE Actuaries UK Conventional Gilts All Stocks Index is one of the specialist indices.

Question 35

Wong is selling his studio apartment and purchasing a larger property. He has agreed to a purchase price of £350,000. The purchase is via an estate agency, who charge a fee of 5%. How much Stamp Duty Land Tax would he pay on this purchase? A. £0 B. £3,500 C. £4,250 D. £5,000

Answer 35

D ## Footnote Stamp Duty Land Tax on residential properties is charged at 0% for the first £250,000, then subject to a tiered charging structure which is 5% on the value between £250,001 and £925,000. In this instance, £100,000 is charged at 5% giving a total of £5,000. Agency fees are paid by the seller and not the buyer. The first £425,000 exemption applies only to first-time buyers.

Question 36

The expansion phase of the economic cycle is characterised by which of the following? A. Rising interest rates. B. Sluggish growth. C. Falling interest rates. D. Falling inflation.

Answer 36

A ## Footnote In the expansion phase there is increased growth and profits, which fuel rising demand. Central banks then tend to increase interest rates to dampen demand and control inflation.

Question 37

Michael has been told he may need to be aware of reinvestment risk. This refers to A. a potential penalty suffered on early encashment within a fixed rate notice period. B. fluctuating interest rates on variable savings accounts. C. the inability to secure the same level of interest on maturing money from fixed rate accounts. D. the withdrawal of maturity investment options on monies in fixed rate and variable rate accounts.

Answer 37

C ## Footnote Reinvestment risk is the risk that investors with fixed interest accounts are unable to obtain the same level of interest when reinvesting their money due to the fact interest rates have fallen.

Question 38

Hydra’s year end accounts show gross profit of £15,625, tax on ordinary activities of £2,325, preference share dividends of £800 (with 2,000 preference shares in issue), ordinary dividends of £1,400 (with 3,000 ordinary shares in issue). From this information we can say that their earnings per share is A. 4.17p B. 4.43p C. 2.5p D. 3.7p

Answer 38

A ## Footnote The earnings per share is calculated as: Profit attributable to ordinary shareholders/Number Of ordinary shares. Profit attributable to ordinary shareholders = profit less tax less dividends to preference shareholders; in Hydra’s case this is £15,625 - £2,325 - £800 = £12,500 Therefore, Hydra’s earnings per share = £12,500 / 3,000 = 4.17p

Question 39

When applying the information ratio (IR), which of the following factors are used in the formula? (Tick all that apply.) A. Fund return B. Benchmark return C. Beta D. Tracking error

Answer 39

A, B, D ## Footnote The information ratio formula measures the risk-adjusted returns of active portfolio managers, the formula is: (Rp - Rb) / Tracking Error where Rp = portfolio (or fund) return and Rb = benchmark return

Question 40

A new competitor enters the market producing essentially the same product as an existing manufacturer. What type of risk is this an example of? A. Non-systematic. B. Systematic. C. Market. D. Diversification.

Answer 40

A ## Footnote Non-systematic risk is risk specific to a particular company, so the answer is a). Diversification risk is the risk of holding too much in one particular company or market so diversifying a portfolio can help to mitigate non-systematic risk. Systematic risk (also known as market risk) is risk that affects the overall market not just a particular share or sector and cannot be avoided.

Question 41

A call option has a strike price that is equal to the current price of the underlying asset. From this information, we can say that this call option is A. in-the-money B. out-of-the-money. C. at-the-money. D. under-the-money.

Answer 41

C ## Footnote When the strike price is the same as the current price of the underlying asset then this is called ‘at-the-money’.

Question 42

Providers of investment trust savings schemes must provide investors with a A. product information document (PID). B. key information document (KID). C. packaged retail information document (PRID). D. key facts document (KFD).

Answer 42

B ## Footnote Providers of investment trust savings schemes currently provide investors with a key information document (KIID) containing essential information regarding the products features.

Question 43

Alexis has a portfolio almost entirely invested in unit trusts. Which of the following characteristics can you tell her apply to unit trusts? (Tick all that apply.) A. The assets of a unit trust are held by an independent depositary. B. Where a unit trust fund does not have an initial charge, an exit charge may be applied. C. Unit trusts are described as being closed-ended. D. There is a direct relationship between the unit price and the underlying investment value.

Answer 43

B, D ## Footnote A unit trust is a collective investment where the value of the investment depends on the underlying assets. They generally have an initial and annual management charge although where a fund does not have an initial charge, an exit charge may be applied instead. There is a direct relationship between the price of a unit and the value of the underlying investments.

Question 44

During their review meeting, Jack’s investment manager reminded him that she used a bottom-up strategy to put together his portfolio. This means that Jack’s investment manager (Tick all that apply.) A. pays no attention to index benchmarks when constructing the portfolio. B. selects stocks purely on the basis of her own criteria. C. determines asset allocation within each of the major regions first. D. chooses the individual stocks within the favoured sectors last.

Answer 44

A, B ## Footnote A manager using the bottom-up strategy pays no attention to benchmarks when putting together or reviewing a portfolio. The fund manager analyses and picks stock purely on her own criteria; the strategy focuses first on stock selection rather than asset/geographical and sector allocation.

Question 45

General expenses can reduce property yields by an average of 25%; which of the following would be classed as general expenses? (Tick all that apply.) A. Income Tax. B. Property management agent’s costs. C. Utility bills. D. Buildings insurance.

Answer 45

B, D ## Footnote General on-going expenses such as property management agent’s costs and buildings insurance (plus costs of maintenance on the property) can reduce property yields by up to around 25%. Income tax would usually be payable on income after the deduction of the general expenses. Utility bills are normally covered by the tenant.

Question 46

The term ’mental accounting’ refers to a client who A. can calculate their net asset position. B. has a different attitude to risk in respect of different objectives. C. has a preference for visual data as opposed to verbal explanations. D. has capacity to grasp stochastic modelling and the use of probability techniques.

Answer 46

B ## Footnote Mental accounting refers to the theory that people like to categorise their money, having a different ‘mental account’ for each economic decision, for example, applying a different attitude to risk in respect of different financial objectives.

Question 47

If a portfolio was worth £12,000 at the start of the period and £12,500 at the end of the period, with £1,500 being paid received during the period, it is true to say that: (Tick all that apply.) A. the holding period return of the portfolio is 16.67%. B. the money weighted rate of return would allow a comparison to be made between fund managers. C. the holding period return of the portfolio is 16.00%. D. the money weighted rate of return is a modified form of the holding period return formula.

Answer 47

A, D ## Footnote The holding period return is the difference in the value of the portfolio at the end of the period and the value of the portfolio at the start of the period plus any income received during that time. The formula is: D + V1 - V0 / V0 Where: D = income received during the period V1 = the value of the portfolio at the end of the period V0 = the value of the portfolio at the start of the period (£1,500 + £12,500 - £12,000)/£12,000 x 100 = 16.67%. Answer (D) is also correct as MWR is a modified form of the holding period return formula and is used to calculate the return over the year adjusting for cash flows.

Question 48

June wishes to accumulate £25,000 at the end of 4 years. She is able to invest at a rate of 4%. What initial amount must she invest to achieve this capital sum? A. £23,000 B. £22,224 C. £21,370 D. £20,548

Answer 48

C ## Footnote To calculate the amount June needs to invest (the present value or PV) we use the formula PV =FV / (1 + r)n where FV = the future value, PV = present value, n = number of time periods and r = interest rate (expressed as a decimal). Therefore, June needs to invest £25,000/(1 + 0.04)4 = £25,000/1.044. = £25,000/1.16986 = £21,370.

Question 49

What is the underlying assumption central to Modern Portfolio Theory (MPT)? A. Investors are completely irrational making decisions based on fact. B. Investors are risk averse and would choose a less risky investment if it offered the same return. C. That investors have persistent biases which are motivated by psychological factors. D. Security prices fully reflect all available information and prices rapidly adjust to new information.

Answer 49

B ## Footnote MPT is a theory on how to construct a portfolio so that the expected return is maximised for the given level of risk, using the underlying assumption that investors are risk averse and given two investments offering the same return they would choose the less risky one.

Question 50

Henry has a salary of £48,000 and two young children. He has recently encashed an investment bond and made a substantial gain. To determine his ‘adjusted net income’ for Child Benefit purposes, the chargeable gain is A. firstly top-sliced before being added to Henry’s income. B. added to Henry’s income without being top sliced. C. an allowable deduction for child benefit purposes. D. only included if the top-sliced gain is in excess of £2,000.

Answer 50

B ## Footnote When working out ‘adjusted net income’ for child benefit purposes, the whole of the chargeable gain is included with Henry’s income, without the benefit of top slicing.

Question 51

A company has suffered reputational damage with recent trading errors caused by internal staff problems. As a result their share price has halved. This is an example of A. downgrade risk. B. bail-in risk. C. systematic risk. D. operational risk.

Answer 51

D ## Footnote Trading errors caused by internal staff problems can lead to reputational damage. This is an example of operational risk.

Question 52

As an alternative to investing directly in property, investors can access this asset class (Tick all that apply.) A. by purchasing a buy-to-let property B. through investment in a property unit trust. C. by buying shares in a listed property company. D. through purchasing a holiday home.

Answer 52

B, C ## Footnote An investor can invest indirectly into property through property unit trusts and by buying shares in a property company. The purchase of a buy-to-let property or a holiday home is direct property investment.

Question 53

Jerome has recently been advised to invest in an index-tracking fund. The most likely reason his adviser has recommended this is to A. provide Jerome with a fixed regular income. B. achieve potential outperformance of the market. C. avoid exposure to socially irresponsible companies. D. mirror an index with no extra risk pursuing outperformance.

Answer 53

D ## Footnote Index-tracking funds are designed to deliver performance that mirrors a particular index, so there is no extra risk in trying to outperform the index. The answer is therefore (d).

Question 54

Louie is considering surrendering his investment and has been advised a market value reduction will be applied. This tells us that Louie is invested in A. a with-profits policy. B. an exchange traded fund. C. a real estate investment trust. D. a stocks and shares ISA.

Answer 54

A ## Footnote Market value reductions are applied at the discretion of the life office to protect customers remaining in a with-profits fund (when others are leaving) during adverse investment conditions.

Question 55

When comparing the Sharpe ratio, Jensen’s alpha and the information ratio, which of the following are correct? (Tick all that apply) A. All take into account the findings of the capital asset pricing model. B. Only the information ratio considers tracking error. C. Alpha and the Sharpe ratio both consider beta. D. They are all ways of measuring risk-adjusted returns.

Answer 55

B, D ## Footnote The Sharpe ratio, information ratio and Jensen’s alpha are all ways of measuring risk-adjusted returns. Only alpha considers the return predicted by the capital asset pricing model and only alpha considers beta. Only the information ratio considers tracking error.

Question 56

If the stock market rises by 4%, which of the following shares is most likely to rise by more than 4%? Share / Beta A / 0.8 B / 0.6 C / 1.2 D / 1 A. Share A. B. Share B. C. Share C. D. Share D.

Answer 56

C ## Footnote Beta is a measure of the volatility of a share compared to the market. A share that swings more than the market over time has a beta above 1.0. Therefore, the answer is c), as share C’s beta is over 1; if the market rises by 4% this share is likely to rise by more.

Question 57

The accounts of Super Utilities PLC show the following Market capitalisation £250,000,000 Number of shares 50,000,000 Share price £5 Revenue £75,000,000 Pre-tax profit £45,000,000 Profit attributable to ordinary shareholders £20,000,000 Total dividend £7,500,000 Based on the information above, what is its dividend cover? A. 10 times. B. 6 times. C. 2.67 times. D. 3.33 times.

Answer 57

C ## Footnote Dividend cover is calculated as profit attributable to ordinary shareholders / total dividend. In this case, it would be £20,000,000 / £7,500,000, or 2.67 times.

Question 58

Dipak and Divyesh have gone to see a financial adviser with a view to investing. Dipak has a credit card debt, whilst Divyesh has a mortgage. In view of their debts A. Divyesh will always be better advised to repay his mortgage before investing. B. Dipak is likely to be able to generate an investment return higher than his credit card interest rate. C. the adviser should not advise either of them to invest at the present time. D. it is likely that Dipak would be better advised to repay his debt before investing.

Answer 58

D ## Footnote Clients with a short-term debt such as a personal loan or a credit card are likely to be best advised to repay this before investing, since the interest rates are likely to be higher than any potential investment returns. Clients with a mortgage may be able to generate a better return by investing the funds. Therefore, investing may be a suitable course of action in some circumstances. However, this is not guaranteed and individual attitudes to risk must be considered carefully before making a recommendation.

Question 59

What primary factors determine the rate of interest paid to an individual? (Tick all that apply.) A. The level of risk taken e.g., gilts versus corporate bonds. B. Notice period on deposit accounts. C. The age of the individual. D. The tax status of the individual.

Answer 59

A, B ## Footnote One of the primary factors determining the rate of interest paid is the level of risk taken - usually the higher the risk, the higher the return e.g. corporate bonds usually have a higher yield than gilts as the risk is greater. Another factor is the notice period on deposit accounts - usually the longer the notice period, the higher the return.

Question 60

Jamie is considering investment in an offshore bank account. As his adviser you should tell him that he A. may receive a higher return than on onshore equivalent. B. will always be protected by the Financial Services Compensation Scheme. C. will be protected from reinvestment risk. D. may be able to avoid paying higher rate Income Tax on any interest.

Answer 60

A ## Footnote Offshore accounts may pay higher rates of interest. However, there may be less compensation available if the institution defaults on its obligations than that available under the Financial Services Compensation Scheme in the UK.

Question 61

You are a financial adviser conducting a fact-find with a new client. Which of the following would be regarded as a ‘soft’ fact? A. Age. B. Attitude to risk. C. Income. D. Liabilities.

Answer 61

B ## Footnote When completing a fact-find, an adviser must gather ‘hard’ and ‘soft’ facts. ‘Soft’ facts help to establish a client’s opinions, goals and aspirations and would include, for example, their attitude to risk as opposed to the ‘hard’ facts which is more factual type information such as age, income and liabilities.

Question 62

When investing in a property authorised investment fund, investors should be aware that A. dividends will be paid net of 20% Income Tax. B. property-related income is exempt from taxation within the fund. C. interest income is paid net of 20% Income Tax. D. all income is treated as property income and paid net of 20% Income Tax.

Answer 62

B ## Footnote When investing in a property authorised investment fund (PAIF) any property-related income is exempt from tax within the fund.

Question 63

During the decumulation stage, clients in retirement A. can take advantage of pound-cost averaging. B. should consider restricting the withdrawal rate to 4% or less of their portfolio. C. should always be encouraged to take an adventurous approach to investing. D. will always be suited to undertake Inheritance Tax planning.

Answer 63

B ## Footnote Evidence suggests that for a client retiring in their 60s, regular withdrawals of over 4% are at risk of being unsustainable. Clients in decumulation would not benefit from pound-cost averaging, which is relevant to those making new savings. As a general rule, clients might usually want to take less risk the older they get. IHT planning is a matter for individual circumstances.

Question 64

Debbie is investing in a purchased life annuity (PLA). In terms of the taxation of this, you can tell her that the income element is A. tax free because it is deemed to be part of the return of her original capital. B. tax free in order for it compete like for like with a pension annuity. C. taxable as savings but cannot be set off against her personal savings allowance. D. taxable as savings which can be offset against her personal savings allowance.

Answer 64

D ## Footnote The capital element of a purchased life annuity is tax-free as it is deemed to be a return of capital. The income element is taxed as savings income. The personal savings allowance can be used.

Question 65

If the annual rate of inflation falls from 0.3% to 0.2% this is an example of A. inflation. B. fiscal policy. C. deflation. D. disinflation.

Answer 65

D ## Footnote Disinflation occurs when there is a decrease in the rate of inflation (the cost of goods and services is still increasing, but at a slower rate).

Question 66

Bobby has been offered shares in a company where he will only qualify for dividend payments after the dividend on ordinary shares has reached a pre-determined level. From this information, we can say that Bobby has been offered A. ‘A’ ordinary shares. B. non-voting ordinary shares. C. preference shares. D. deferred ordinary shares.

Answer 66

D ## Footnote Deferred ordinary shareholders do not usually qualify for a dividend until the dividend on the ordinary shares has reached a pre-determined level, or until a specific period after their issue.

Question 67

Joseph has a target of five years to repay his mortgage. Which of the following risks should Joseph be particularly mindful of? A. Shortfall risk. B. Inflation risk. C. Volatility risk. D. Income risk.

Answer 67

A ## Footnote Shortfall risk relates to the risk that an investor might not achieve their financial target when saving/investing.

Question 68

The following investments have recently been made Investor / Product Charlotte / Guaranteed Equity bond Kieren / Maximum Investment Plan Finn / Structured deposit account Herbie / Cash ISA Which investor(s) will benefit from pound-cost averaging? A. Kieren and Charlotte. B. Finn only. C. Finn and Herbie. D. Kieren only.

Answer 68

D ## Footnote Pound cost averaging works for regular premium savings contracts (as the investor benefits from market volatility by investing small amounts regularly). A Maximum Investment Plan is a regular premium savings contract, so Kieren is the only one that will benefit.

Question 69

Calder PL has issued 4 types of preference shares; you would normally expect the shareholders to be ranked according to A. the date the investor purchased the shares, with the earliest having higher priority. B. the level of investment, with larger investors having higher priority. C. their priority for payment of dividends and entitlement to capital on wind-up. D. the number of preference shareholders compared to ordinary shareholders.

Answer 69

C ## Footnote Preference shares are generally ranked according to their priority for the payment of dividends and entitlement to capital on wind-up.

Question 70

The following shares are held by Jill, Mark and Ned: Name / Share / Beta Jill / A / 0.6 Mark / B / 1.3 Ned / C / 0.8 If all three investors hold their shares for the same amount of time, we can say that A. if the stock market falls by 4% Mark’s share is likely to fall more. B. if the stock market rises by 4% Jill’s share is likely to fall (but less than 4%). C. Ned is holding an ‘aggressive’ security. D. Jill’s share is the most volatile.

Answer 70

A ## Footnote Beta is a measure of the volatility of a stock compared to the market. The beta of the market is represented by 1. A stock that swings more than the market over time has a beta above 1.0. Therefore, the answer is (a), as Mark’s beta is over 1, if the market falls by 4% his stock is likely to fall by more. The lower the beta, the less volatile the share is deemed to be.

Question 71

Which of the following is an advantage of purchasing ordinary equity shares in a business as opposed to corporate bonds? A. Priority in the event of liquidation. B. Receipt of a fixed income. C. A seat on the board. D. Access to voting rights.

Answer 71

D ## Footnote Ordinary shareholders rank behind bondholders in the event of a company’s liquidation and also usually receive a dividend based on profitability rather than a fixed interest that most bonds provide. They allow some degree of control over the company in the form of voting rights. However, an individual retail investor purchasing shares on the stock market would not be granted a seat on the board.

Question 72

Emma is considering redirecting some of her regular savings from a unit trust to a self-invested personal pension (SIPP). In terms of protection under the Financial Services Compensation Scheme (FSCS), Emma should be aware that A. her pension will be fully protected as a long term insurance contract. B. if her SIPP operator fails, her compensation is limited to £85,000. C. 90% of her fund will be protected if her SIPP operator fails, with no upper limit. D. SIPPs are not covered by the FSCS.

Answer 72

B ## Footnote If a personal pension provider fails, 100% of the claim is protected by the Financial Services Compensation Scheme (FSCS) (with no upper limit). However, if a SIPP operator fails, the compensation available is just £85,000 per eligible person, per firm.

Question 73

Which of the following would be considered one of the key areas of information to be obtained from a client’s fact-find? A. Family history. B. Childhood diseases. C. Assets and liabilities. D. Hazardous sports.

Answer 73

C ## Footnote Assets and liability are one of the key areas of information that must be obtained from a client’s fact-find.

Question 74

When trading financial futures, open positions are re-valued on a daily basis. This is known as A. making the market. B. trading the market. C. on the market. D. marking to market.

Answer 74

D ## Footnote When ‘open positions’ are held, the financial futures are re-valued on a daily basis; this is known as marking to market

Question 75

When using alpha to evaluate a portfolio a financial adviser should be aware that (Tick all that apply.) A. a positive alpha indicates performance is better than was predicted by its beta. B. alpha is part of the return which can’t be explained by overall market movements. C. alpha is measured using the standard deviation of returns. D. it is not possible to achieve a negative alpha.

Answer 75

A, B ## Footnote Alpha is the difference between the expected return given the beta and the actual return, therefore a positive alpha would indicate performance has been better than that predicted by its beta. Alpha is part of the return that cannot be explained by overall market movements. An alpha can be positive or negative.

Question 76

Freda has a stocks and shares ISA, a general investment account and various open-ended investment company funds. If Freda were to hold all of her investments on a platform, the main advantage is that A. she will not have to declare any income via self-assessment. B. the platform may offer automatic portfolio rebalancing. C. she will receive free investment advice from the platform. D. she is guaranteed a minimum amount of investment return.

Answer 76

B ## Footnote One of the benefits of holding investments on a platform is that it may offer automatic portfolio rebalancing.

Question 77

When describing the time-weighted rate of return, it is correct to say that (Tick all that apply) A. it can only be used to assess performance of equity investments. B. it is a more effective method of comparison than the money-weighted rate of return. C. it is not distorted by the timing of new injections or withdrawals. D. it breaks the overall return down into a number of sub-periods.

Answer 77

B, C, D ## Footnote The time-weighted rate of return is a better means of comparing different portfolios than the money-weighted rate of return as it is not distorted by the timing of cashflows. It breaks the overall return down into sub-periods between each capital movement and produces a compounded return. It is equally effective whatever the underlying investment.

Question 78

Where a client has an Income Tax bill to pay in the next six months, they should be advised to hold the money to pay for this in A. long-term corporate bonds. B. a stocks and shares ISA. C. an Exchange-traded fund. D. a deposit account.

Answer 78

D ## Footnote Any short-term requirements for cash should be easily accessible. The deposit account is the most appropriate place.

Question 79

Changes to a client’s investment objectives may come about as a result of any of the following. (Tick all that apply.) A. Receipt of an inheritance. B. Getting divorced. C. Redundancy. D. New reporting requirements.

Answer 79

A, B, C ## Footnote Changes in a client’s investment objectives may come about as a result of a change in personal circumstances including employment or marital status or a financial windfall. Changes to reporting requirements may impact the responsibilities of the adviser/ manager but would not usually change the client’s objectives.

Question 80

Which fund management style is based on finding sectors that tend to do well at particular points in the business cycle? A. Momentum. B. Growth At A Reasonable Price. C. Contrarianism. D. Value.

Answer 80

A ## Footnote An example of momentum investment is ‘sector rotation’ where sectors are expected to perform well at particular points in the economic cycle.

Question 81

Which fund management style is based on finding companies with long-term sustainable advantage often used by active growth managers? A. Momentum. B. Growth At A Reasonable Price. C. Contrarianism. D. Value.

Answer 81

B ## Footnote The growth at a reasonable price (GAARP) investment style is based on finding companies with a long-term sustainable advantage and is often used by active growth managers.

Question 82

A limited company has a high dividend cover; this might suggest that the company is (Tick all that apply.) A. paying out too much profit and the position is unsustainable. B. retaining the majority of its earnings. C. able to maintain the existing dividend if profits fell. D. paying the majority of profits to shareholders with little reinvestment in the business.

Answer 82

B, C ## Footnote Dividend cover is a measure of how many times the dividend could be paid out of the current earnings. A high dividend cover may suggest that the company is retaining most of their profits for reinvestment into the business and also suggests it is more likely that the existing dividend could be maintained if profits fell. A low dividend cover would suggest the company may be paying out too much profit relative to their earnings and so the position may be unsustainable or that the majority of profits are being paid to shareholders with little being reinvested into the company.

Question 83

Derry purchases a holding of 5% XYZ corporate bonds with a nominal value of £100. He pays a lower price of £95. This is most likely to be because. A. interest rates have gone up since the bond was issued. B. the redemption date is less than two years away. C. the issuer’s credit rating has improved drastically. D. he purchased the bond on the primary market.

Answer 83

A ## Footnote When interest rates increase, the price of a corporate bond with a fixed rate of return is likely to reduce, since a lower value would need to be purchased to generate the same return. This would only apply to secondary market purchases, since primary market issues are at the nominal value. A better credit rating would be likely to increase the value of the company’s securities. Term to maturity by itself does not alter bond prices.

Question 84

As well as the main FTSE index, what other FTSE indices are produced to cover specific areas of the main market? (Tick all that apply.) A. FTSE global B. FTSE sterling C. FTSE TMT D. FTSE techMARK

Answer 84

C, D ## Footnote The FTSE TMT (technology, media and telecommunications stocks) and FTSE techMARK (innovative technology stocks) are other FTSE indices produced to cover specific areas of the main market. (Note: the other index is the FTSE4good - companies that meet globally recognised corporate socially responsible standards).

Question 85

When there is a sustained fall in prices, this is known as A. disinflation. B. monetary policy easing. C. deflation. D. financial repression.

Answer 85

C ## Footnote Deflation is a sustained fall in prices.

Question 86

When central banks inject money directly into the economy by purchasing government bonds from investors this is known as A. fiscal policy. B. quantitative tightening. C. secondary market activity. D. quantitative easing.

Answer 86

D ## Footnote Quantitative easing is where central banks inject money directly into the economy by purchasing government bonds from investors.

Question 87

In times of low economic activity, what can be done to stimulate demand using monetary policy? A. Decrease government spending. B. Decrease taxation. C. Increase taxation. D. Decrease interest rates.

Answer 87

D ## Footnote In times of low economic activity, the government can use monetary policy to decrease interest rates in an attempt to stimulate demand in the economy.

Question 88

Kevin wishes to invest in property and has been advised a Real Estate Investment Trust (REIT) is an option for him. Which of the following is true regarding how a REIT will be taxed on Kevin? (Tick all that apply.) A. Gains from REITs are subject to Capital Gains Tax. B. Payment from the tax-exempt element is paid gross but liable to tax at 20%. C. Dividends from the non-exempt element are paid gross. D. Gains are chargeable events and subject to Income Tax at Kevin's marginal rate.

Answer 88

A, C ## Footnote Dividends from the non-exempt element of a REIT (i.e. the element not exempt from corporation tax for the REIT) are paid gross to an investor, whilst income from the tax-exempt element (i.e. exempt from corporation tax for the REIT) is paid net of 20% (non-taxpayers can claim this back whilst higher and additional taxpayers are subject to further tax at 20% and 25% respectively). Gains are subject to CGT in the normal way.

Question 89

Which of the following ISA transfers would result in the preservation of tax benefits? (Tick all that apply.) A. A transfer made in cash. B. An investment re-registered in the new ISA manager’s name. C. A transfer made to the investor who then re-invests with the new ISA manager. D. A transfer made as a combination of investments and cash.

Answer 89

A, B, D ## Footnote To preserve tax benefits ISA transfers can be made in cash; investments may be re-registered in the new ISA manager’s name; transfers can be made in a combination of investments and cash. The transfer must go directly to the new ISA manager as if it is paid directly to the investor, it is treated as a withdrawal and will lose its tax benefits.

Question 90

Three companies operating in the same sector have financial data as per the following table Earnings per share / Share price Company A - £0.25 / £5 Company B - £0.15 / £4 Company C - £0.50 / £25 This information suggests that A. company A’s shares are significantly overpriced. B. company B’s price earnings ratio is below the industry average. C. company B has the lowest price-earnings ratio. D. company C may be seen as having the best growth prospects.

Answer 90

D ## Footnote Price/earnings (P/E) ratio is calculated as the share price / earnings per share. For company A, that’s 5/0.25 = 20. For company B, it’s 4/0.15 = 26.67. For company C it’s 25/0.50 = 50. A high P/E ratio tends to indicate that the market is excited about the company’s growth prospects. As the highest, C is therefore seen as having the best growth prospects.

Question 91

Dan runs a hedge fund and relies on arbitrage to produce his returns. This suggests that he is using which of the following strategies? A. Event driven. B. Relative value. C. Tactical trading. D. Long/short.

Answer 91

B ## Footnote If Dan is relying on using arbitrage (the practise of buying and selling securities across different markets to take advantage of differing prices of the same security) to produce his returns, he is using the ‘relative value’ strategy.

Question 92

Paul is considering renting out a room in his home. Which of the following are qualifying rules for ‘rent a room’ relief? (Tick all that apply.) A. It is only available to owners of property. B. The property must be unfurnished. C. Paul must occupy the property at the same time as the tenant. D. The relief is only available for furnished accommodation.

Answer 92

C, D ## Footnote To qualify for ‘rent a room’ relief Paul must occupy the property at the same time as the tenant, and the accommodation must be furnished.

Question 93

Standard deviation is an important statistical measurement in finance and is a measurement of A. how widely the actual return of an investment varies around its average or expected return. B. covariance between the returns on investments within the portfolio. C. the relationship between the return that can be expected from a portfolio and the risk of the portfolio. D. the risk premium of an investment.

Answer 93

A ## Footnote The standard deviation measures how widely the actual return on an investment differs from its expected or average return.

Question 94

Which of the following would you generally expect to affect the share price of a particular company as opposed to affecting the market as a whole? (Tick all that apply.) A. Pessimism about the sector. B. Profit expectations. C. Recession. D. An increase in inflation

Answer 94

A, B ## Footnote You would generally expect a recession and a change in the rate of inflation to have an impact on share prices across the market as a whole, but pessimism about a sector may only have an impact on a specific business market. Profit expectations will more likely affect the share price of a particular company rather than having market or sector wide implications.

Question 95

Ella’s risk profile has been established as ‘cautious growth’. Ella sells some of her equity holdings rather than some of her bond investments to pay for her daughter’s university fees. This is likely to be because A. Ella was overweight in equities. B. the market has been volatile of late. C. Ella needed the money quickly. D. interest rates are rising.

Answer 95

A ## Footnote If it has been established that Ella’s risk profile is ‘cautious growth’, it is likely that her equity holdings had increased above the initial recommended percentage allocation (as equities tend to outperform bonds over longer periods). You would therefore expect her to sell her equity rather than her bond holdings so the portfolio can be rebalanced back to the asset allocation agreed for Ella as a cautious investor.

Question 96

Alan is looking at investing in an alternative investment fund (AIF). He should be aware that (Tick all that apply) A. these funds are generally aimed at professional or institutional investors. B. hedge funds and private equity are examples of AIFs. C. these funds may be subject to marketing restrictions. D. an AIF fund may also be categorised as a UK UCITS fund.

Answer 96

A, B, C ## Footnote Alternative Investment Funds (AIFs) are generally aimed at professional or institutional investors and include, amongst others, hedge funds and private equity funds. They are subject to increased regulatory protections including marketing restrictions. AIFs are not categorised as UK UCITS funds.

Question 97

Josian has had a with-profit policy for a number of years and is now considering surrendering it. She should be aware that a market value reduction (MVR) can be applied A. as per guidelines set out in the FCA Handbook. B. as per guidelines set out by the ABI. C. at the discretion of the policyholders. D. at the discretion of the life office.

Answer 97

D ## Footnote Market value reductions are applied at the discretion of the life office to protect customers remaining in a with-profit fund (when others are leaving) during adverse investment conditions.

Question 98

Ryan and Mary have £117,000 held jointly in a savings account. In the event of the institution becoming insolvent, how much could they expect to recover under the Financial Services Compensation Scheme (FSCS)? A. £58,500 B. £85,000 C. £117,000 D. £150,000

Answer 98

C ## Footnote The Financial Services Compensation Scheme provides 100% compensation to investors (should an institution fail) of up to £85,000 of cash savings per institution. If an account is in joint names, each individual is eligible to claim the full £85,000; therefore, Ryan and Mary could expect to recover the full £117,000.

Question 99

During the global financial crisis, the majority of shares on the London Stock Exchange fell; this is known as A. systematic risk. B. bail in risk. C. non-systematic risk. D. downgrade risk.

Answer 99

A ## Footnote Systematic risk is the risk that there may be a reduction in returns as result of a fall in the stock market generally. During the financial crisis virtually all shares on the London Stock Exchange fell.

Question 100

£1,500 is invested for 5 years at an annual rate of 3.5%. Approximately, how much will be accumulated at the end of 5 years? A. £6,720 B. £1,781 C. £3,282 D. £1,843

Answer 100

B ## Footnote The compound interest formula is FV = PV(1 + r)n where FV = the future value, PV = present value, n = number of time periods and r = interest rate in decimals (i.e. 0.035). Therefore: FV = £1,500 (1 + 0.035)5 = £1,500 x 1.0355 = £1,781 (To calculate 1.0355 use the xy button on your scientific calculator).