Chapter 1 - Asset Classes Flashcards
What is the primary reason for holding cash deposits?
A) To earn capital growth
B) To maintain liquidity
C) To hedge against inflation
D) To invest in high-risk assets
Answer: B) To maintain liquidity
Explanation: Liquidity refers to the ease and speed with which investments can be turned into cash to meet spending needs. Instant access accounts are highly liquid, allowing immediate access to funds.
Why might savers choose cash deposits over other forms of assets?
A) They offer high capital growth
B) They provide greater security
C) They ensure protection from inflation
D) They provide guaranteed high returns
Answer: B) They provide greater security
Explanation: Cash deposit accounts are characterised by a high level of security, making them a safe option for savers. However, their purchasing power may be eroded by inflation.
How does inflation affect cash deposits?
A) It increases the capital value of deposits
B) It has no effect on cash deposits
C) It erodes the purchasing power of capital
D) It ensures higher interest rates
Answer: C) It erodes the purchasing power of capital
Explanation: While cash deposits are secure, inflation reduces the value of money in terms of what it can buy, which affects purchasing power.
What is the purpose of the Annual Equivalent Rate (AER)?
A) To indicate the nominal interest rate of an account
B) To compare accounts based on interest compounding frequency
C) To show the interest after tax deductions
D) To calculate capital growth on deposits
Answer: B) To compare accounts based on interest compounding frequency
Explanation: The AER shows the true rate of return by considering how often interest is compounded, allowing savers to compare accounts on a like-for-like basis.
When is the AER no longer meaningful?
A) If the account has a low balance
B) If interest is withdrawn before the period ends
C) If interest rates are variable
D) If interest is paid monthly
Answer: B) If interest is withdrawn before the period ends
Explanation: The AER assumes that interest is left to roll over in the account. If the saver withdraws the interest, the compounding effect is lost, and the AER no longer reflects the actual return.
How do tiered interest rates benefit savers with large deposits?
A) By offering them a fixed rate of return
B) By providing higher interest rates for larger deposits
C) By guaranteeing protection against inflation
D) By offering instant access to funds
Answer: B) By providing higher interest rates for larger deposits
Explanation: Deposit takers often pay higher interest rates for larger deposits, incentivising savers to deposit more funds.
What is a key difference between instant access accounts and fixed-term deposits?
A) Instant access accounts have higher interest rates
B) Fixed-term deposits offer better liquidity
C) Fixed-term deposits generally have fixed interest rates
D) Instant access accounts provide guaranteed returns
Answer: C) Fixed-term deposits generally have fixed interest rates
Explanation: Fixed-term deposits usually offer a set interest rate for the entire term, unlike instant access accounts, which typically have variable rates.
How does compounding affect the return on cash deposits?
A) It increases the nominal interest rate
B) It generates interest on previously earned interest
C) It eliminates the need for AER
D) It provides instant access to funds
Answer: B) It generates interest on previously earned interest
Explanation: Compounding occurs when interest is added to the principal, and future interest is calculated on the new total, enhancing returns over time.
What happens when interest is paid more frequently in an account?
A) The nominal interest rate increases
B) The AER decreases
C) The return for savers improves due to compounding
D) The account becomes less liquid
Answer: C) The return for savers improves due to compounding
Explanation: More frequent interest payments result in compounding, where each interest payment contributes to higher returns.
Why might accounts that pay monthly or quarterly interest have a higher AER?
A) They offer higher nominal rates
B) They have lower capital requirements
C) They reflect the compounding effect of frequent payments
D) They are tax-free
Answer: C) They reflect the compounding effect of frequent payments
Explanation: The AER accounts for the compounding effect of frequent interest payments, which increases the effective return for savers.
How does gross interest differ from net interest?
A) Gross interest is paid after tax deductions
B) Net interest includes compounding effects
C) Gross interest is paid before tax deductions
D) Net interest is always higher than gross interest
Answer: C) Gross interest is paid before tax deductions
Explanation: Gross interest is the contractual rate before any tax deductions, while net interest is the amount received after tax is deducted.
What is the compounding factor formula used for?
A) To calculate the nominal interest rate
B) To determine the terminal wealth of a deposit
C) To compare fixed-term deposits
D) To calculate tax liability
Answer: B) To determine the terminal wealth of a deposit
Explanation: The formula calculates the terminal wealth of a deposit by considering the annual rate of interest, frequency of payments, and duration.
Why might a saver choose an account that pays interest quarterly over one that pays annually?
A) To access higher nominal rates
B) To benefit from more frequent compounding
C) To avoid gross interest deductions
D) To ensure fixed interest rates
Answer: B) To benefit from more frequent compounding
Explanation: Quarterly payments result in compounding more frequently, which increases the overall return compared to annual payments.
What is the real rate of return on cash deposits?
A) The amount of interest received on deposits
B) The nominal interest rate minus the expected future rate of inflation
C) The rate of inflation added to the nominal interest rate
D) The expected future inflation rate
Answer: B) The nominal interest rate minus the expected future rate of inflation
Explanation: The real rate of return is the return on cash deposits after adjusting for inflation. It can be calculated by subtracting the expected rate of inflation from the nominal interest rate, as shown in the Fisher equation.
What is the Fisher equation used for?
A) To calculate the interest rate charged on loans
B) To describe the relationship between nominal interest rates, real interest rates, and inflation
C) To determine the deposit taker’s operational risk
D) To calculate the penalty for early withdrawal from a deposit
Answer: B) To describe the relationship between nominal interest rates, real interest rates, and inflation
Explanation: The Fisher equation helps in determining the real rate of return by comparing the nominal interest rate with the expected rate of inflation, thus allowing for more accurate predictions about the purchasing power of cash deposits.
What is the purpose of requirement linked accounts?
A) To guarantee a fixed interest rate for a specified period
B) To provide access to high-interest rates based on meeting certain conditions
C) To offer deposits without any terms or conditions
D) To give a fixed amount of interest regardless of the conditions
Answer: B) To provide access to high-interest rates based on meeting certain conditions
Explanation: Requirement linked accounts offer higher-than-average interest rates, but the saver must meet specific conditions, such as maintaining a minimum balance or depositing a certain amount regularly.
Which of the following is considered a risk associated with deposit-taking products?
A) Currency risk
B) Default risk
C) Systematic risk
D) Business risk
Answer: B) Default risk
Explanation: Default risk refers to the possibility that the deposit taker may become insolvent and unable to repay its debts, which could result in the loss of capital for the depositor.
What is the primary purpose of the Prudential Regulation Authority (PRA) in the UK?
A) To oversee the day-to-day supervision of the financial market
B) To promote the safety and soundness of firms in the financial services sector
C) To manage the competition between financial services firms
D) To regulate asset managers and independent financial advisers
Answer: B) To promote the safety and soundness of firms in the financial services sector
Explanation: The PRA is responsible for ensuring that financial institutions are operating safely and soundly. It plays a key role in maintaining financial stability and protecting savers, investors, and policyholders.
Which risk involves the possibility of the rate of inflation exceeding the interest rate on deposits?
A) Interest rate risk
B) Inflation risk
C) Operational risk
D) Default risk
Answer: B) Inflation risk
Explanation: Inflation risk occurs when the rate of inflation is higher than the interest rate paid on deposits, leading to a negative real rate of return and the erosion of purchasing power.
In what scenario does deflation risk arise?
A) When interest rates increase rapidly
B) When prices of goods and services decrease
C) When inflation is controlled
D) When the savings account offers a higher interest rate than inflation
Answer: B) When prices of goods and services decrease
Explanation: Deflation risk arises in an economic environment where prices are falling, which may delay investments or purchases, even though it could increase the purchasing power of deposits.
Which regulatory body is responsible for ensuring that UK markets function properly and consumers get a fair deal from financial services?
A) Bank of England (BoE)
B) Financial Conduct Authority (FCA)
C) Prudential Regulation Authority (PRA)
D) European Banking Authority (EBA)
Answer: B) Financial Conduct Authority (FCA)
Explanation: The FCA is tasked with ensuring that financial markets function well, protecting consumers, and promoting competition within the UK financial services industry.
Which of the following fees might a saver encounter for using their debit card abroad?
A) ATM withdrawal fee
B) Foreign transaction fee
C) Overdraft fee
D) Account maintenance fee
Answer: B) Foreign transaction fee
Explanation: Foreign transaction fees are commonly charged when a debit card is used for transactions in foreign currencies or abroad, while ATM withdrawal fees relate to cash withdrawals.
What is the purpose of the Financial Services and Markets Bill introduced in November 2022 in the UK?
A) To regulate asset managers
B) To introduce secondary objectives focused on growth and competitiveness
C) To eliminate inflation risks
D) To restrict the interest rates banks can charge on loans
Answer: B) To introduce secondary objectives focused on growth and competitiveness
Explanation: The Financial Services and Markets Bill aimed to introduce growth and competitiveness as secondary objectives for the PRA and FCA, with the goal of enhancing the UK’s position as a global financial hub after Brexit.
What is the primary purpose of a credit rating for banks and deposit takers?
A) To show how much interest the bank charges
B) To assess the financial strength and ability to meet liabilities
C) To evaluate the customer service of the bank
D) To determine the quality of the bank’s investments
Answer: B) To assess the financial strength and ability to meet liabilities
Explanation: Credit ratings are used to evaluate a bank’s financial health and its likelihood of meeting liabilities to customers.
Which of the following credit ratings is considered to be investment grade?
A) BB/Ba
B) A or BBB/Baa
C) C or below
D) D
Answer: B) A or BBB/Baa
Explanation: A rating of A or BBB/Baa is considered investment grade, indicating a strong financial standing.
Which of the following is generally excluded from FSCS coverage?
A) Deposits by private individuals
B) Larger businesses
C) Joint accounts
D) Temporary large balances
Answer: B) Larger businesses
Explanation: Larger businesses are generally excluded from FSCS coverage, which is primarily for private individuals and smaller businesses.
What is the maximum compensation offered by the Financial Services Compensation Scheme (FSCS) for a single account holder in the UK?
A) £100,000
B) £85,000
C) £50,000
D) £170,000
Answer: B) £85,000
Explanation: The FSCS provides up to £85,000 of compensation per eligible account holder in the event of a bank failure.
What is the FSCS compensation limit for joint accounts?
A) £170,000
B) £85,000
C) £100,000
D) £50,000
Answer: A) £170,000
Explanation: Joint accounts are eligible for compensation up to £170,000, with each account holder receiving £85,000.
Which types of investments are NOT covered by the FSCS?
A) Private pensions
B) Crowdfunding investments
C) Bank deposits in the UK
D) Individual stocks
Answer: B) Crowdfunding investments
Explanation: Crowdfunding investments, especially those without suitable advice, are generally not covered under FSCS unless the advice was from an authorised firm.
What is the protection limit for deposits in the Channel Islands and Isle of Man?
A) £85,000
B) £50,000
C) €100,000
D) $250,000
Answer: B) £50,000
Explanation: Jersey, Guernsey, and the Isle of Man have their own schemes, protecting up to £50,000 per person.
Which of the following deposit protection schemes covers deposits up to €100,000?
A) FSCS
B) US FDIC
C) European Deposit Guarantee Scheme (DGS)
D) China Deposit Insurance Scheme
Answer: C) European Deposit Guarantee Scheme (DGS)
Explanation: The DGS provides protection for up to €100,000 per depositor in Europe
Which country has a deposit protection scheme covering up to $250,000 per person per institution?
A) China
B) US
C) Japan
D) Europe
Answer: B) US
Explanation: The FDIC in the US insures deposits up to $250,000 per person per institution.
Which type of account would typically have restrictions on the amount that can be deposited and added after the account is opened?
A) Current account
B) Fixed-term deposit
C) Instant access account
D) Money market account
Answer: B) Fixed-term deposit
Explanation: Fixed-term deposits generally do not allow additional deposits once the account is opened.
What is a common feature of instant access accounts?
A) No withdrawal restrictions
B) Higher interest rates than fixed-term accounts
C) Typically no interest earned
D) Restrictions on the number of withdrawals
Answer: A) No withdrawal restrictions
Explanation: Instant access accounts allow savers to access their money without restrictions, though interest rates are typically lower than fixed-term accounts.
What is a potential penalty for breaking a fixed-term deposit early?
A) Deduction of a small fee
B) Loss of interest
C) Loss of principal
D) Additional tax charges
Answer: B) Loss of interest
Explanation: Fixed-term deposits often penalize early withdrawals by deducting some or all of the interest earned.
What type of account is typically used for transactional purposes, allowing the holder to access money at any time?
A) Instant access account
B) Money market account
C) Current account
D) Fixed-term deposit
Answer: C) Current account
Explanation: Current accounts are designed for day-to-day transactions, allowing easy access to funds.
Which of the following accounts is known for earning interest at a variable rate, but often without providing a cheque book?
A) Instant access account
B) Fixed-rate account
C) Notice account
D) Money market account
Answer: A) Instant access account
Explanation: Instant access accounts allow withdrawals at any time and generally earn interest at a variable rate, but may not provide cheque books.
What does a notice account require before a saver can withdraw funds?
A) A fixed term
B) Giving a set period of notice
C) A fee payment
D) No requirements
Answer: B) Giving a set period of notice
Explanation: Notice accounts require the saver to give a specified period of notice before withdrawing funds.
What is the main disadvantage of money market accounts compared to regular savings accounts?
A) They offer lower interest rates
B) They are less liquid
C) They don’t allow withdrawals
D) They require higher minimum deposits
Answer: B) They are less liquid
Explanation: Money market accounts are less liquid than regular savings accounts, meaning there are limits on withdrawals.
Which type of account involves a fixed interest rate for a set term?
A) Term (fixed-term) accounts
B) Current accounts
C) Instant access accounts
D) Money market accounts
Answer: A) Term (fixed-term) accounts
Explanation: Term accounts offer a fixed interest rate for a set period, with the principal returned at the end of the term.
What type of account involves investing in short-term, low-risk instruments like certificates of deposit and Treasury bills?
A) Money market account
B) Instant access account
C) Fixed-rate account
D) Notice account
Answer: A) Money market account
Explanation: Money market accounts typically invest in low-risk, short-term instruments such as CDs and T-bills.
What is the primary purpose of National Savings & Investments (NS&I)?
A) To manage the UK’s monetary policy
B) To provide deposit and savings products to the investing public
C) To regulate financial institutions in the UK
D) To provide loans to corporations
Answer: B) To provide deposit and savings products to the investing public
Explanation: NS&I is an executive agency of the Chancellor of the Exchequer, offering savings and investment products to the public, raising funds on behalf of the UK government.
What is one key factor that determines the amount a bank contributes to the European Deposit Guarantee Scheme (DGS)?
A) The bank’s size
B) Its risk profile
C) The number of customers
D) The location of the bank
Answer: B) Its risk profile
Explanation: Banks contribute to the DGS based on their risk profile, among other factors.
Which of the following is a characteristic of the products offered by NS&I?
A) They are guaranteed by the UK government
B) They are subject to capital gains tax (CGT)
C) They require authorization by the UK regulator
D) There is an overall limit on how much is guaranteed
Answer: A) They are guaranteed by the UK government
Explanation: The products offered by NS&I are backed by the UK government, effectively eliminating default risk, and there is no overall limit on the guarantee.
Which of the following NS&I products is NOT taxable?
A) Income Bonds
B) Direct ISA
C) Green Savings Bond
D) British Savings Bond
Answer: B) Direct ISA
Explanation: The Direct ISA product is a tax-free account, unlike others like Income Bonds and British Savings Bond, which are taxable.
Which of the following is true about the liquidity of money market funds?
A) Treasury bills (T-bills) are less liquid than certificates of deposit (CDs)
B) Money market funds invest in short-term debt instruments and are generally highly liquid
C) Commercial paper is more liquid than Treasury bills
D) Money market funds have no liquidity
Answer: B) Money market funds invest in short-term debt instruments and are generally highly liquid
Explanation: Money market funds typically invest in short-term assets like T-bills and commercial paper, making them highly liquid.
Which type of money market fund maintains a stable NAV of £1 (or its equivalent)?
A) Accumulating net asset value (ANAV)
B) Variable net asset value (VNAV)
C) Constant net asset value (CNAV)
D) Low volatility net asset value (LVNAV)
Answer: C) Constant net asset value (CNAV)
Explanation: CNAV funds maintain an unchanging face value, meaning their NAV stays stable, typically at £1.
Which of the following is NOT a type of money market fund mentioned in the text?
A) Constant net asset value (CNAV)
B) Accumulating net asset value (ANAV)
C) High volatility net asset value (HVNAV)
D) Variable net asset value (VNAV)
Answer: C) High volatility net asset value (HVNAV)
Explanation: The text mentions CNAV, ANAV, LVNAV, and VNAV funds, but there is no reference to a high volatility net asset value (HVNAV) fund.
What is the main advantage of money market funds for investors?
A) They offer the highest returns in the investment market
B) They offer high liquidity and the safety of principal
C) They invest primarily in long-term equities
D) They guarantee a fixed return for a long term
Answer: B) They offer high liquidity and the safety of principal
Explanation: Money market funds are popular due to their focus on liquidity and safety, as they invest in short-term, low-risk instruments.
What happens when a money market fund ‘breaks the buck’?
A) The fund’s NAV remains the same
B) The NAV falls below £1 and may lead to losses
C) The fund’s manager increases the NAV
D) The fund is closed immediately
Answer: B) The NAV falls below £1 and may lead to losses
Explanation: “Breaking the buck” refers to a situation where the NAV of the money market fund falls below £1 due to poor asset performance, leading to potential losses.
Which of the following is true about the tax status of NS&I products?
A) Premium Bonds are subject to capital gains tax (CGT)
B) British Savings Bonds are exempt from all forms of tax
C) Income Bonds are subject to income tax
D) Green Savings Bonds are exempt from tax
Answer: C) Income Bonds are subject to income tax
Explanation: Income Bonds, like many other NS&I products, are taxable, specifically under income tax, but they are not subject to CGT.
Which of the following types of assets do money market funds typically invest in?
A) Equities
B) Commercial paper
C) Real estate
D) Long-term bonds
Answer: B) Commercial paper
Explanation: Money market funds primarily invest in short-term debt instruments like commercial paper, which are issued by large corporations.
What year did the P2P lending market begin?
A) 2000
B) 2005
C) 2010
D) 2015
Answer: B) 2005
Explanation: The P2P lending market began in 2005 and has grown significantly since, especially after the global financial crisis.
What is the primary difference between P2P lending and crowdfunding?
A) P2P lending involves equity investment, whereas crowdfunding does not
B) P2P lending does not involve financial intermediaries, while crowdfunding does
C) Crowdfunding raises equity, while P2P lending involves borrowing money
D) There is no difference between P2P lending and crowdfunding
Answer: C) Crowdfunding raises equity, while P2P lending involves borrowing money
Explanation: Crowdfunding seeks to raise equity from investors, whereas P2P lending involves lending money without a financial intermediary, like a bank.
What is a major risk of P2P lending?
A) Low interest rates
B) Borrower default
C) High transaction fees
D) Government regulation
Answer: B) Borrower default
Explanation: One of the main risks of P2P lending is the potential for borrowers to default on repayment.
How does P2P lending companies mitigate the risk of borrower default?
A) They insure the loans against defaults
B) They underwrite each borrower by reviewing credit history and verifying identity
C) They only allow borrowers with perfect credit scores
D) They have high interest rates to offset defaults
Answer: B) They underwrite each borrower by reviewing credit history and verifying identity
Explanation: P2P lending companies mitigate default risk by underwriting borrowers, reviewing their credit history, and verifying their identity.
What happens when a borrower defaults in P2P lending?
A) The lender loses all of their invested amount
B) The defaulted loan is written off completely
C) The default risk is spread across multiple lenders
D) The borrower is immediately blacklisted
Answer: C) The default risk is spread across multiple lenders
Explanation: To reduce the impact of default, the loan is typically spread across many smaller lenders, so the failure of one borrower doesn’t significantly affect any single lender.
What risk was highlighted during the COVID-19 pandemic regarding P2P lending?
A) Interest rates dropped too low
B) Regulatory authorities intervened
C) Illiquidity and frozen withdrawals
D) Lenders were not paid back
Answer: C) Illiquidity and frozen withdrawals
Explanation: During the COVID-19 pandemic, P2P platforms froze withdrawals as nervous investors rushed to withdraw funds, leaving them unable to access their cash for several months.
What type of regulatory interest has P2P lending attracted?
A) There is no regulatory interest in P2P lending
B) Regulators worldwide are focusing on this market due to its rapid growth and increased risks
C) Only the UK has taken an interest in regulating P2P lending
D) Regulations are the same across all countries
Answer: B) Regulators worldwide are focusing on this market due to its rapid growth and increased risks
Explanation: P2P lending has attracted regulatory attention worldwide due to its rapid growth and the increased risks it poses to consumers.
How does P2P lending work for potential lenders?
A) Lenders must apply for a loan to lend money
B) Lenders deposit money with the P2P firm and get matched with borrowers
C) Lenders need to have a bank guarantee
D) Lenders choose borrowers based on their personal preferences
Answer: B) Lenders deposit money with the P2P firm and get matched with borrowers
Explanation: Lenders open an account, deposit money, and are then matched with borrowers requesting loans from the same firm.
What is one disadvantage of early access to P2P loan capital?
A) It comes with high interest rates
B) The lender cannot receive any returns
C) The loan may be transferred to another lender, and liquidity is not guaranteed
D) There are no fees involved
Answer: C) The loan may be transferred to another lender, and liquidity is not guaranteed
Explanation: If a lender requires early access to capital, the loan can be transferred to another lender, but this does not guarantee short-term liquidity, and a fee may be charged.
How are P2P lending returns taxed in the UK?
A) No tax is due on P2P lending returns
B) P2P returns are automatically taxed at source
C) The interest must be declared to the tax authorities and taxed accordingly
D) P2P returns are tax-free for all amounts under £10,000
Answer: C) The interest must be declared to the tax authorities and taxed accordingly
Explanation: In the UK, the interest earned from P2P lending is not taxed at source and must be declared to the tax authorities for tax calculation.
What is the primary characteristic of fixed income securities?
A) They offer variable returns based on market conditions
B) They involve the issuer borrowing funds from investors with a promise to repay the principal and often provide regular interest payments
C) They involve the investor borrowing funds from the issuer
D) They are only issued by governments
Answer: B) They involve the issuer borrowing funds from investors with a promise to repay the principal and often provide regular interest payments.
Explanation: Fixed-income securities, like bonds, involve the issuer borrowing funds from the investor with the commitment to repay the capital and pay interest during the life of the bond.
What is the minimum credit rating for a bond to be considered investment grade?
A) BB/Ba
B) BBB
C) Baa
D) A
Answer: B) BBB
Explanation: A bond is considered investment grade if its long-term credit rating is BBB or higher by Fitch or S&P, or Baa or higher by Moody’s.
What does the spread between two bonds typically represent?
A) The difference in coupon rates
B) The difference in their maturity dates
C) The difference in credit risk
D) The difference in bond denominations
Answer: C) The difference in credit risk
Explanation: The spread between two bonds reflects the difference in perceived credit risk, with higher spreads typically associated with higher-risk bonds.
What was Greece’s credit rating in 2007 before the global financial crisis?
A) A1
B) C
C) Aaa
D) BBB
Answer: A) A1
Explanation: In 2007, Greece’s sovereign debt was rated A1 by Moody’s, indicating a relatively low level of credit risk.
What happens to the spread between bonds when a country’s credit rating is downgraded?
A) It narrows
B) It widens
C) It remains unchanged
D) It becomes irrelevant
Answer: B) It widens
Explanation: When a country’s credit rating is downgraded, the perceived risk of holding its bonds increases, which causes the spread between its bonds and those of higher-rated countries to widen.
What is the key feature of foreign bonds?
A) They are issued in a foreign currency but sold in the domestic market
B) They are always issued by international organizations
C) They are issued by foreign entities in the domestic market’s currency
D) They are only issued by supranational bodies
Answer: C) They are issued by foreign entities in the domestic market’s currency
Explanation: Foreign bonds are issued by a foreign entity in the domestic market’s currency, such as a US company issuing bonds in Canadian dollars.
What is the difference between a foreign bond and a eurobond?
A) Eurobonds are always issued in euros
B) Foreign bonds are issued in the domestic market, while eurobonds can be issued in any major currency
C) Eurobonds can only be traded in the EU
D) There is no difference between the two
Answer: B) Foreign bonds are issued in the domestic market, while eurobonds can be issued in any major currency
Explanation: Eurobonds are not restricted to being issued in euros and can be issued in any major currency, while foreign bonds are issued in the domestic market’s currency.
What does the nominal value of a bond represent?
A) The amount an investor pays for the bond in the secondary market
B) The market price of the bond at the time of issue
C) The amount the issuer agrees to repay the bondholder at maturity
D) The total interest paid over the life of the bond
Answer: C) The amount the issuer agrees to repay the bondholder at maturity
Explanation: The nominal value, or face value, of a bond is the amount the issuer promises to repay to the bondholder at maturity.
What is the clean price of a bond?
A) The price including accrued interest
B) The price quoted after deducting taxes
C) The price excluding accrued interest
D) The price after considering market fluctuations
Answer: C) The price excluding accrued interest
Explanation: The clean price of a bond is quoted without the accrued interest, while the dirty price includes the accrued interest.
What does the term “maturity date” refer to?
A) The day the bondholder can redeem the bond
B) The final date when the bond issuer repays the principal
C) The first coupon payment date
D) The day the bond price is fixed
Answer: B) The final date when the bond issuer repays the principal
Explanation: The maturity date is the date when the issuer repays the nominal value of the bond to the bondholder.
What is a callable bond?
A) A bond that the issuer can redeem before its maturity date
B) A bond that can be traded on the secondary market
C) A bond that pays higher coupons
D) A bond with a fixed interest rate for life
Answer: A) A bond that the issuer can redeem before its maturity date
Explanation: A callable bond gives the issuer the right to redeem the bond earlier than the maturity date, usually when interest rates decrease.
What is a puttable bond?
A) A bond where the issuer can repay the debt early
B) A bond that can only be redeemed on the maturity date
C) A bond that allows the holder to sell it back to the issuer before maturity
D) A bond issued by a government entity
Answer: C) A bond that allows the holder to sell it back to the issuer before maturity
Explanation: Puttable bonds give bondholders the right to sell the bond back to the issuer before its maturity.
How are bonds classified in terms of maturity in the UK?
A) Long-term, mid-term, and short-term
B) Short, medium, and long
C) Short, medium, and ultra-long
D) By coupon rate
Answer: B) Short, medium, and long
Explanation: Bonds in the UK are classified as short (under five years), medium (five to 15 years), and long (over 15 years) based on the time to redemption.
What is an ultra-long bond?
A) A bond with a maturity of more than 30 years
B) A bond that has no maturity date
C) A bond with a maturity of 50 to 100 years
D) A bond with no coupon payments
Answer: C) A bond with a maturity of 50 to 100 years
Explanation: Ultra-long bonds are those with maturities of 50 or even 100 years, often classified as long bonds.
Which type of bond has no maturity date?
A) Callable bond
B) Perpetual bond
C) Corporate bond
D) Treasury bond
Answer: B) Perpetual bond
Explanation: A perpetual bond has no maturity date, and the issuer is not obligated to redeem the principal, although they may choose to do so.
What is a bond with a bullet redemption?
A) A bond with multiple redemption dates
B) A bond that matures on a single, predetermined date
C) A bond that can be sold back to the issuer
D) A bond with no coupon payments
Answer: B) A bond that matures on a single, predetermined date
Explanation: A bullet redemption bond is redeemed at a single, specified maturity date, where the principal and final coupon are repaid.
What type of bond allows the issuer to choose between two maturity dates?
A) Puttable bond
B) Double-dated bond
C) Callable bond
D) Zero-coupon bond
Answer: B) Double-dated bond
Explanation: A double-dated bond allows the issuer to choose between two possible maturity dates for redemption.
What is the role of a bond’s coupon rate?
A) It determines the price at which the bond will be issued
B) It determines the interest payments the issuer makes to the bondholder
C) It sets the maturity date
D) It sets the bond’s nominal value
Answer: B) It determines the interest payments the issuer makes to the bondholder
Explanation: The coupon rate determines the periodic interest payments that the issuer makes to the bondholder.
What is the term “secondary market” referring to in relation to bonds?
A) A market where bonds are initially issued
B) A market where bonds are bought and sold after their initial issue
C) A market for bonds with a rating of BBB or above
D) A market where only government bonds are traded
Answer: B) A market where bonds are bought and sold after their initial issue
Explanation: The secondary market refers to the buying and selling of bonds after they have been initially issued in the primary market.
How do credit ratings impact high-yield bonds?
A) They result in higher coupon payments and lower risk of default
B) They lead to higher yields due to a higher risk of default
C) They result in lower coupon payments
D) They are irrelevant to high-yield bonds
Answer: B) They lead to higher yields due to a higher risk of default
Explanation: High-yield bonds have lower credit ratings and are associated with a higher risk of default, which leads to higher coupon payments to compensate for this risk.
What is the term “dirty price” in relation to bonds?
A) The price that includes the bond’s accrued interest
B) The market price when a bond is first issued
C) The price of the bond minus the coupon payment
D) The price based on the bond’s credit rating
Answer: A) The price that includes the bond’s accrued interest
Explanation: The dirty price is the price of a bond that includes accrued interest since the last coupon payment.
What does the “coupon” of a bond refer to?
A) The bond’s maturity date
B) The total interest paid over the life of the bond
C) The amount of interest paid annually based on the nominal value of the bond
D) The price at which the bond is issued
Answer: C) The amount of interest paid annually based on the nominal value of the bond
Explanation: The coupon refers to the amount of interest an investor will earn each year based on the nominal value (NV) of a bond. The NV is the original amount borrowed by the issuer. The coupon is typically a fixed amount, but some bonds may have coupons that fluctuate based on market conditions.
Which of the following bond types adjusts its coupon payments based on a reference interest rate, such as SONIA or SOFR?
A) Fixed-rate bonds
B) Floating rate notes (FRNs)
C) Inflation-linked bonds (ILBs)
D) Zero Coupon Bonds (ZCBs)
Answer: B) Floating rate notes (FRNs)
Explanation: Floating rate notes (FRNs) have a coupon rate that is tied to a short-term market interest rate (e.g., SONIA or SOFR). The coupon is adjusted regularly based on changes in these reference rates, making them attractive during periods of interest rate volatility.
Which of the following is an example of a bond that does not pay regular interest but instead is issued at a discount and redeemed at face value?
A) Fixed-rate bonds
B) Floating rate notes (FRNs)
C) Inflation-linked bonds (ILBs)
D) Zero Coupon Bonds (ZCBs)
Answer: D) Zero Coupon Bonds (ZCBs)
Explanation: Zero Coupon Bonds (ZCBs) do not pay regular interest. Instead, they are issued at a price lower than their face value and redeemed at par value (face value) at maturity. The return is realized through this price appreciation.
In the UK, what is the tax treatment of bond coupons?
A) All bond coupons are taxed as capital gains
B) Coupons are taxed as income, subject to the individual’s personal savings allowance
C) Coupons are exempt from tax
D) Coupons are taxed at a fixed rate regardless of income
Answer: B) Coupons are taxed as income, subject to the individual’s personal savings allowance
Explanation: In the UK, bond coupons are taxed as income. If the income falls within the individual’s personal savings allowance (PSA), no further tax is owed. Otherwise, it will be taxed at the investor’s marginal income tax rate.
What is a “subordinated” bond?
A) A bond that is repaid before other obligations
B) A bond with no coupon payments
C) A bond that ranks lower in the capital structure for repayment in case of liquidation
D) A bond with a fixed interest rate
Answer: C) A bond that ranks lower in the capital structure for repayment in case of liquidation
Explanation: A subordinated bond (also known as junior debt) ranks lower in the repayment order in case the issuer goes into liquidation. It is repaid after unsubordinated or senior bonds have been repaid.
What is the typical nominal value (NV) used when discussing bonds?
A) £1,000, $10,000, €1,000
B) £100, $1,000, €100
C) £500, $500, €500
D) £1,000, $500, €100
Answer: B) £100, $1,000, €100
Explanation: The nominal value (NV) of a bond is the amount originally borrowed by the issuer and typically referred to in these denominations for ease of calculation and communication.
What is the main purpose of issuing government bonds like UK gilts?
A) To raise money for private corporations
B) To provide an investment opportunity for individual bondholders
C) To finance government operations and infrastructure projects
D) To reduce the national debt
Answer: C) To finance government operations and infrastructure projects
Explanation: Government bonds, like UK gilts, are issued to raise money for financing government operations, including paying for state benefits and funding infrastructure projects such as road building. They are a primary tool for managing government debt.
What type of bond provides protection against inflation by adjusting both the interest payments and capital repayment according to inflation rates?
A) Fixed-rate bonds
B) Floating rate notes (FRNs)
C) Inflation-linked bonds (ILBs)
D) Zero Coupon Bonds (ZCBs)
Answer: C) Inflation-linked bonds (ILBs)
Explanation: Inflation-linked bonds (ILBs) adjust their interest payments and principal repayment based on inflation measures, such as the Retail Price Index (RPI) or Consumer Price Index (CPI). This makes them useful for protecting investors against inflation.
Which of the following types of bonds provides protection against inflation?
A) Floating Rate Notes (FRNs)
B) Inflation-Linked Bonds (ILBs)
C) Zero Coupon Bonds (ZCBs)
D) Government Bonds
Answer: B) Inflation-Linked Bonds (ILBs)
Explanation: Inflation-Linked Bonds (ILBs), also called index-linked bonds or linkers, adjust their interest payments and capital repayment according to inflation rates like the retail prices index (RPI) or the consumer prices index (CPI). This makes them a popular choice for investors looking for protection against inflation.
What are UK Local Authority Bonds often referred to collectively as on the London Stock Exchange (LSE)?
A) Government Bonds
B) Corporation Stocks
C) Treasury Bonds
D) Public Works Loans
Answer: B) Corporation Stocks
These bonds are commonly referred to as corporation stocks when traded on the LSE.
What does the term “basis points” refer to in the context of Floating Rate Notes (FRNs)?
A) 1 basis point is equal to 1%
B) 1 basis point is equal to 0.1%
C) 1 basis point is equal to 0.01%
D) 1 basis point is equal to 0.001%
Answer: C) 1 basis point is equal to 0.01%
Explanation: A basis point is a unit of measurement used in finance to describe changes in interest rates or other percentages. One basis point equals 0.01%, so a quoted margin of 25 basis points would be equivalent to 0.25%.
Why were local authority bonds considered safer in the past?
A) They were secured by the government
B) They were guaranteed by the Public Works Loans Board (PWLB)
C) They were backed by private investors
D) They were insured by financial institutions
Answer: B) They were guaranteed by the Public Works Loans Board (PWLB)
Before the PWLB’s abolition in 2020, these bonds were considered safer because of the guarantee from the PWLB.
What security method backs local authority bonds?
A) Guarantee from the Public Works Loans Board (PWLB)
B) Charge over the assets of the issuing authority
C) Government bonds
D) Treasury guarantees
Answer: B) Charge over the assets of the issuing authority
Local authority bonds are typically secured by a charge over the assets of the issuing authority, meaning assets can be sold to raise money if needed.
Which type of local authority bonds are marketable and issued for no longer than two years?
A) Local Authority Fixed Stocks
B) Local Authority Negotiable Loans (Yearlings)
C) Local Authority Treasury Bills
D) Local Authority Investment Bonds
Answer: B) Local Authority Negotiable Loans (Yearlings)
These bonds, known as Yearlings, are marketable and issued for a maximum of two years.
What happened to the functions of the PWLB after its abolition in 2020?
A) They were transferred to private banks
B) The PWLB’s functions were taken over by the Treasury, with operational responsibility delegated to the DMO
C) They were passed to the Bank of England
D) The functions were absorbed by the local authorities themselves
Answer: B) The PWLB’s functions were taken over by the Treasury, with operational responsibility delegated to the DMO
After the abolition, the Treasury now oversees the functions that were once handled by the PWLB.
What is the primary characteristic of government bonds that make them “risk-free”?
A) They are issued by private companies
B) They are supported by the government’s ability to print money or raise taxes
C) They are backed by insurance policies
D) They are issued in denominations too large to be defaulted on
Answer: B) They are supported by the government’s ability to print money or raise taxes
Government bonds are often considered “risk-free” because the government can raise taxes or print money to redeem them at maturity.
Which of the following is a type of Local Authority Bond?
A) Local Authority Fixed Stocks
B) Local Authority Adjustable Bonds
C) Local Authority Variable Rate Stocks
D) Local Authority Yield Bonds
Answer: A) Local Authority Fixed Stocks
Local Authority Fixed Stocks are a type of bond issued with fixed rates, but they are not marketable and must be held until maturity unless redeemed early.
Which of the following countries has government bonds referred to as “Bunds”?
A) France
B) Germany
C) Japan
D) Canada
Answer: B) Germany
In Germany, government bonds are commonly known as Bunds and are issued with maturities ranging between ten and 30 years.
What is the typical feature of Treasury Bills (T-bills)?
A) They pay regular interest payments
B) They are issued at a discount and redeemed at face value
C) They are only available to government officials
D) They are backed by corporate guarantees
Answer: B) They are issued at a discount and redeemed at face value
T-bills do not pay interest; instead, they are sold at a discount and redeemed at face value, with the investor’s return coming from the price increase.
What is a common maturity period for US Treasury Bills (T-bills)?
A) 1 year
B) 6 months
C) 26 weeks
D) 4 weeks
Answer: C) 26 weeks
US T-bills are typically issued in maturities of 4, 8, 13, 26, or 52 weeks, with 26 weeks being one of the most common.
What feature distinguishes convertible loan stocks (convertible bonds) from standard corporate bonds?
A) They are always redeemable
B) They allow the holder to convert them into equity
C) They carry a variable interest rate
D) They are issued by governments and local authorities
Answer: B) They allow the holder to convert them into equity
Explanation: Convertible loan stocks give the holder the option to convert their bonds into shares at predetermined terms. This feature distinguishes them from standard corporate bonds, which generally do not offer conversion options.
Which of the following is true about Permanent Interest-Bearing Shares (PIBS)?
A) They offer guaranteed repayment of principal at maturity
B) PIBS holders receive capital gains tax (CGT) on disposal
C) PIBS are non-cumulative, meaning interest is not guaranteed each year
D) PIBS can be redeemed by building societies at any time
Answer: C) PIBS are non-cumulative, meaning interest is not guaranteed each year
Explanation: PIBS are non-cumulative, meaning that in times of financial difficulty, the issuing building society is not obligated to pay interest in any given year, nor is it required to roll it over to the next year.
What is the main difference between debentures and convertibles?
A) Debentures are backed by security; convertibles are not
B) Debentures are interest-free, while convertibles offer equity conversion
C) Debentures have a higher interest rate than convertibles
D) Convertibles cannot be traded in the secondary market
Answer: A) Debentures are backed by security; convertibles are not
Explanation: Debentures are backed by security, such as land or buildings, and the assets must be sold in case of liquidation. Convertibles, on the other hand, are bonds that can later be converted into equity or other bonds, providing the potential for capital growth.
What is a key characteristic of a qualifying corporate bond (QCB) in the UK?
A) It is interest-free
B) It is interest-paying and denominated in sterling
C) It is convertible into equity
D) It is issued by a government entity
Answer: B) It is interest-paying and denominated in sterling
Explanation: A qualifying corporate bond (QCB) is a bond that is interest-paying and denominated in sterling. This makes it exempt from capital gains tax (CGT) under UK tax law, provided it meets these criteria.
What is the main advantage of contingent convertibles (CoCos) for banks?
A) They provide an immediate return to investors
B) They allow banks to satisfy regulatory capital requirements without impacting shareholders
C) They offer guaranteed returns for bondholders
D) They are always converted into equity in case of default
Answer: B) They allow banks to satisfy regulatory capital requirements without impacting shareholders
Explanation: CoCos are designed to convert into equity in times of financial stress, thus helping banks meet regulatory capital requirements without impacting existing shareholders until the conversion option is exercised.
Which of the following best describes the role of supranational bonds?
A) They are issued by multinational corporations
B) They are issued by countries to raise taxes
C) They are issued by international entities formed by multiple countries
D) They are high-risk bonds with low credit ratings
Answer: C) They are issued by international entities formed by multiple countries
Explanation: Supranational bonds are issued by entities like the European Investment Bank (EIB) or the World Bank, which are formed by multiple countries. These bonds are considered some of the safest investments, with very high credit ratings.
What was one of the contributing factors to the global financial crisis of 2007-2008 involving Asset-Backed Securities (ABSs)?
A) Government intervention caused market instability
B) The pooling of high-quality mortgages only
C) Risky lending practices and loose credit standards leading to defaults
D) The introduction of mortgage-backed securities in the 1980s
Answer: C) Risky lending practices and loose credit standards leading to defaults
Explanation: The global financial crisis was exacerbated by the pooling of high-risk subprime mortgages in ABSs. Many of these mortgages were given to borrowers without proper income verification, which led to high default rates when the housing market collapsed.
What is a key characteristic of Asset-Backed Securities (ABSs)?
A) They are always backed by government revenue
B) They are only backed by government assets
C) They are collateralized by a pool of assets like loans or leases
D) They can only be issued by private companies
Answer: C) They are collateralized by a pool of assets like loans or leases
Explanation: ABSs are bonds that are backed by a pool of financial assets, such as loans or leases. These assets are bundled together, making it easier to sell the securities in the market.
What is the key principle of Islamic finance as related to investments?
A) Interest is allowed in all forms of investment.
B) Investments should focus on capital preservation.
C) All forms of interest are forbidden, and risk is shared.
D) Investment is solely based on speculation.
Answer: C) All forms of interest are forbidden, and risk is shared.
Explanation: Islamic finance operates under the principle that all forms of interest (Riba) are forbidden, and investments should be based on sharing risk and profits between the investor and the bank or financial institution.
Which of the following is a significant structure of sukuk?
A) Mutual fund sukuk.
B) Ijarah sukuk.
C) Dividend sukuk.
D) Stock sukuk.
Answer: B) Ijarah sukuk.
Explanation: Ijarah sukuk involves the transfer or sale of an asset, often with the option of lease-back, for a specified period and consideration. It is one of the most common forms of sukuk in Islamic finance.
What are sukuk?
A) A form of conventional bonds with high returns.
B) Equity shares of companies in the Middle East.
C) Bond-like instruments representing ownership in an underlying asset under Shariah law.
D) A type of insurance product.
Answer: C) Bond-like instruments representing ownership in an underlying asset under Shariah law.
Explanation: Sukuk are Islamic financial certificates that resemble bonds but are based on an underlying tangible asset or project. They comply with Shariah law, which prohibits interest.
What is a unique feature of perpetual sukuk?
A) It has a specific maturity date.
B) It can be redeemed or amortised at the issuer’s discretion at any time.
C) It only provides dividends to the holders.
D) It cannot be traded.
Answer: B) It can be redeemed or amortised at the issuer’s discretion at any time.
Explanation: Perpetual sukuk have no specific maturity date. They offer flexibility to the issuer, who can decide to redeem or amortise the sukuk as needed, providing a unique feature in comparison to standard sukuk.
What is a concern associated with green bonds?
A) They are only issued by individuals.
B) The lack of standardization regarding what constitutes a ‘green’ bond.
C) They are less profitable than conventional bonds.
D) They are only available in specific countries.
Answer: B) The lack of standardization regarding what constitutes a ‘green’ bond.
Explanation: A major concern with green bonds is that there is no clear, universally accepted standard for what qualifies as a ‘green’ bond. This can lead to “greenwashing,” where bonds are marketed as green without meeting the necessary environmental criteria.
What is the primary purpose of green bonds?
A) To raise funds for general corporate purposes.
B) To raise funds for environmentally sustainable projects.
C) To invest in fossil fuel-related projects.
D) To fund military and defense projects.
Answer: B) To raise funds for environmentally sustainable projects.
Explanation: Green bonds are debt instruments specifically used to finance projects that have positive environmental or climate benefits, such as renewable energy and pollution prevention.
What is the primary focus of blue bonds?
A) Land-based renewable energy projects.
B) Forest preservation and agriculture.
C) Marine and ocean-based projects.
D) Water scarcity solutions.
Answer: C) Marine and ocean-based projects.
Explanation: Blue bonds, like green bonds, are designed to finance environmental projects, but their focus is specifically on marine and ocean-based initiatives, such as marine protected areas and fisheries management.
Which UK government initiative aimed at net-zero includes green bonds?
A) The Climate Action Plan.
B) The Green New Deal.
C) The Green Gilt Framework.
D) The Environmental Bond Initiative.
Answer: C) The Green Gilt Framework.
Explanation: In 2020, the UK government introduced its Green Gilt Framework, detailing how funds from green bonds would be used to meet climate goals and support net-zero objectives.
Which country issued the first sovereign blue bond in 2018?
A) Maldives.
B) Seychelles.
C) Philippines.
D) Kenya.
Answer: B) Seychelles.
Explanation: The Republic of Seychelles issued the world’s first sovereign blue bond in 2018, raising $15 million to support marine protection and governance of fisheries.
What does the term “yield” generally refer to in investing?
A) The initial capital invested
B) The return an investor makes on an investment
C) The amount of time a bond takes to mature
D) The risk associated with an investment
Answer: B) The return an investor makes on an investment
Explanation: Yield refers to the return an investor receives from an investment, which can be income, capital growth, or both.
What does the “Running Yield” of a bond measure?
A) The total return from interest payments and capital gains
B) The annual income return as a percentage of the current market price
C) The capital gain or loss from the bond if held until maturity
D) The total amount of coupon payments received over a bond’s life
Answer: B) The annual income return as a percentage of the current market price
Explanation: Running yield is calculated by dividing the bond’s gross coupon rate by its market price, giving the income return as a percentage of the investment.
What is the difference between “income yield” and “gross redemption yield (GRY)”?
A) Income yield includes capital gains, while GRY focuses on income.
B) Income yield focuses on the coupon return, while GRY includes capital growth or loss.
C) GRY is net of tax, whereas income yield is gross.
D) Income yield is more relevant for bonds with short maturities, while GRY is for long-term bonds.
Answer: B) Income yield focuses on the coupon return, while GRY includes capital growth or loss.
Explanation: Income yield is the annual return based on the coupon and market price, while GRY includes both income yield and the capital growth or loss an investor might experience if holding the bond to maturity.
Which of the following factors does NOT affect the price of a bond?
A) Market demand
B) Interest rates
C) The duration of the bond
D) Investor sentiment
Answer: C) The duration of the bond
Explanation: The price of a bond is influenced by factors such as market demand, interest rates, and investor sentiment. Duration, while important for assessing price sensitivity to interest rate changes, does not directly affect the bond price itself.
How is the Gross Redemption Yield (GRY) related to capital appreciation?
A) It is unaffected by capital appreciation.
B) If the bond is purchased below par, capital appreciation will add to the GRY.
C) Capital appreciation reduces the GRY by increasing the purchase price.
D) The GRY is only calculated based on the bond’s coupon rate.
Answer: B) If the bond is purchased below par, capital appreciation will add to the GRY.
Explanation: GRY considers both the coupon payments and any capital gain or loss from buying a bond at a price different from par. If purchased below par, there will be capital appreciation, adding to the yield.
What is the Macaulay Duration used for?
A) To measure the time until a bond matures
B) To assess the price sensitivity of a bond to interest rate changes
C) To calculate the total return of a bond at maturity
D) To determine the coupon rate of a bond
Answer: B) To assess the price sensitivity of a bond to interest rate changes
Explanation: Macaulay Duration is used to measure a bond’s sensitivity to interest rate changes, combining the effects of the coupon and maturity period on price volatility.
How does a bond’s coupon rate influence its price volatility?
A) Bonds with higher coupon rates are more volatile than bonds with lower rates.
B) Higher coupon bonds tend to be less volatile because a smaller change in interest rates represents a smaller proportional change.
C) Coupon rates have no effect on price volatility.
D) Bonds with zero coupons are less volatile than bonds with high coupons.
Higher coupon bonds tend to be less volatile because a smaller change in interest rates represents a smaller proportional change.
Explanation: Higher coupon bonds generally experience less volatility because the return from interest payments is more significant compared to price changes due to interest rate fluctuations.
What is the primary consequence for holders of fixed-interest securities when market interest rates rise?
A) The coupon becomes more attractive.
B) The price of the bond increases due to higher demand.
C) The coupon becomes less attractive, and the price of the bond falls.
D) The investor earns higher returns on the bond.
Answer: C) The coupon becomes less attractive, and the price of the bond falls.
Explanation: When market interest rates rise, the coupon of a fixed-interest bond becomes less attractive relative to new issues, causing demand to drop. As a result, the price of the bond falls.
What is the primary feature of FRNs (Floating Rate Notes)?
A) They offer fixed returns regardless of market rates.
B) They are immune to inflation.
C) They are designed to protect investors from rises in interest rates.
D) They are risk-free investments.
Answer: C) They are designed to protect investors from rises in interest rates.
Explanation: FRNs adjust their coupon rates according to market interest rates, helping protect investors from the negative effects of rising interest rates.
What is the main risk to fixed-interest securities in relation to inflation?
A) Inflation has no effect on fixed-interest securities.
B) Inflation can erode the real return on the bond, potentially making it negative.
C) Inflation causes the price of bonds to increase.
D) Inflation guarantees higher interest payments for bondholders.
Answer: B) Inflation can erode the real return on the bond, potentially making it negative.
Explanation: High inflation can reduce the purchasing power of the bond’s returns, leading to a negative real return for bondholders if inflation outpaces the bond’s yield.
What type of bonds are most likely to be the most liquid?
A) Small, off-the-run bonds.
B) On-the-run bonds from the most recently issued bond series.
C) Bonds from issuers with poor credit ratings.
D) Bonds from low-risk or bankrupt issuers.
Answer: B) On-the-run bonds from the most recently issued bond series.
Explanation: On-the-run bonds are typically the most liquid as they are more frequently traded in the market, especially compared to older or smaller issues (off-the-run bonds).
What is the key difference between debt and equity in terms of investor security?
A) Debt holders are paid after shareholders in liquidation.
B) Equity holders are guaranteed dividends.
C) Debt holders have higher priority for repayment in the event of liquidation.
D) Debt holders benefit from price appreciation and dividends.
Answer: C) Debt holders have higher priority for repayment in the event of liquidation.
Explanation: In a liquidation, creditors (debt holders) are repaid before shareholders, which gives debt instruments a higher level of security compared to equity.
Which type of bond issuer is generally considered the safest for investors?
A) Junk bond issuers.
B) Bonds issued by small private companies.
C) Government-issued bonds.
D) Bonds from companies in financial distress.
Answer: C) Government-issued bonds.
Explanation: Government bonds are typically considered the safest because governments are less likely to default compared to corporate issuers, although defaults can still occur.
What is a credit enhancement in relation to bond issuers?
A) A mechanism to reduce interest rates for bondholders.
B) A method to increase bond yields for investors.
C) A guarantee from a third party to make payments if the issuer defaults.
D) A legal process that ensures the bond issuer can never default.
Answer: C) A guarantee from a third party to make payments if the issuer defaults.
Explanation: Credit enhancements, such as guarantees from financially strong organizations, make bonds more attractive by reducing the risk of default.
How does the secondary market impact the primary market?
A) It has no effect on the primary market.
B) It can decrease the interest rates on new issues.
C) It can push up yields for future issues if there is a large volume of selling.
D) It guarantees the success of the primary market.
Answer: C) It can push up yields for future issues if there is a large volume of selling.
Explanation: If many bonds are sold in the secondary market, the increased supply can cause yields on future bonds from the same issuer to rise.
How are bonds typically bought and sold?
a) Through a direct deal with the issuer
b) Through a stockbroker
c) Through a bank’s investment department
d) Only on major stock exchanges
Answer: b) Through a stockbroker
Bonds are typically bought and sold through a stockbroker, who may charge a commission. The commission rate may vary depending on the broker and the size of the deal.
What is one potential advantage of buying government bonds directly from the government rather than through a stockbroker?
a) Lower risk
b) Potentially lower dealing costs
c) Ability to trade on major stock exchanges
d) Guaranteed return rates
Answer: b) Potentially lower dealing costs
Buying bonds directly from the government may result in lower commission charges compared to those levied by stockbrokers, making it an attractive option for retail invest
How do investors place a bid when buying gilts at auction in the UK?
a) Only through a stockbroker
b) By completing an application form and bidding through the DMO
c) By sending a text message to the DMO
d) By calling the government’s investment department
Answer: b) By completing an application form and bidding through the DMO
Investors can participate in gilt auctions by completing an application form and submitting their bids through the Debt Management Office (DMO), either directly or via a GEMM.
What is the difference between competitive and non-competitive bids in gilt auctions?
a) Competitive bids are guaranteed to be met, while non-competitive bids may not be successful
b) Non-competitive bids are guaranteed to receive the requested amount of stock at the average price, while competitive bids are riskier
c) Non-competitive bids can be placed for any amount, while competitive bids have size limitations
d) Competitive bids are lower than non-competitive bids in price
Answer: b) Non-competitive bids are guaranteed to receive the requested amount of stock at the average price, while competitive bids are riskier
Non-competitive bids guarantee that the investor will receive the stock at the average price accepted in the auction, while competitive bids may result in a partial allocation or no allocation if the bid price is too low.
Why are corporate bonds typically not traded on major exchanges?
a) They are too volatile for exchange trading
b) There is not enough demand to support exchange trading
c) Corporate bonds are usually sold over-the-counter (OTC) due to their diversity in terms of qualities, maturities, and yields
d) They are only sold directly to banks and large investors
Answer: c) Corporate bonds are usually sold over-the-counter (OTC) due to their diversity in terms of qualities, maturities, and yields
The diverse nature of corporate bonds, with varying maturities, qualities, and yields, makes it difficult for them to be traded on major exchanges. Instead, they are mostly traded in decentralized markets or OTC.
What is the primary role of a dealer in the corporate bond market?
a) To set the prices for bonds on exchanges
b) To provide liquidity by buying and selling bonds and facilitating trades
c) To issue bonds to investors
d) To manage the government’s bond auction process
Answer: b) To provide liquidity by buying and selling bonds and facilitating trades
Dealers in the corporate bond market act as market makers, providing liquidity by being willing to buy or sell bonds, and facilitating trades between buyers and sellers.
What is the purpose of the underwriting spread in the corporate bond market?
a) To set the final price of the bonds
b) To cover the risk associated with bond trading
c) To compensate the underwriter for their role in distributing the bonds
d) To ensure that bonds are sold at the correct market price
Answer: c) To compensate the underwriter for their role in distributing the bonds
The underwriting spread is the difference between the price at which the underwriter buys the bonds from the issuer and the price at which they sell them to investors. This spread compensates the underwriter for taking on the distribution role.
What is a key feature of the LSE’s Order Book for Retail Bonds (ORB) platform?
a) It is only for institutional investors
b) It allows retail investors to buy gilts, supranational bonds, and UK corporate bonds
c) It only offers corporate bonds to large funds
d) It is a platform for trading equities rather than bonds
Answer: b) It allows retail investors to buy gilts, supranational bonds, and UK corporate bonds
The ORB platform enables retail investors to directly purchase a range of gilts, supranational bonds, and UK corporate bonds, increasing investment opportunities for individuals.
What does “tick size” refer to on the ORB platform?
a) The minimum amount of bonds that can be purchased
b) The minimum price movement for bonds during trading hours
c) The time it takes for a bond transaction to settle
d) The maximum price a bond can be sold for
Answer: b) The minimum price movement for bonds during trading hours
The “tick size” refers to the smallest price movement that can occur for a bond on the platform during trading hours. For the ORB platform, the tick size is £0.01.
What is the main difference between retail and wholesale bond markets?
a) Wholesale bond markets are smaller than retail markets
b) Retail bond markets allow for larger investments
c) Retail bonds are generally sold to private investors, while wholesale bonds are sold to institutional investors
d) Wholesale bonds are only sold via exchanges
Answer: c) Retail bonds are generally sold to private investors, while wholesale bonds are sold to institutional investors
The retail bond market is designed for private investors and has smaller investment denominations, while the wholesale bond market primarily caters to institutional investors with larger denominations.
What does the term “clean price” of a bond refer to?
A) The price of a bond including accrued interest.
B) The price of a bond excluding accrued interest.
C) The total annual interest of a bond.
D) The price of a bond adjusted for inflation.
Answer: B) The price of a bond excluding accrued interest.
Explanation: The clean price is the market price of the bond excluding any accrued interest. Accrued interest is added to the clean price to calculate the dirty price.
What is the formula used to calculate accrued interest on a bond?
A) Coupon rate × Number of days since last payment ÷ Total number of days in the coupon period.
B) Annual interest × Settlement date ÷ Coupon payment date.
C) Market price ÷ Number of days in a year.
D) Coupon rate ÷ Total number of days in the year.
Answer: A) Coupon rate × Number of days since last payment ÷ Total number of days in the coupon period.
Explanation: Accrued interest is calculated by multiplying the coupon rate (usually halved for semi-annual payments) by the fraction of the coupon period that has elapsed since the last payment.
What does “ex-dividend” (xd) mean in relation to bonds?
A) The bond pays no interest in its next cycle.
B) The bondholder is not entitled to the next interest payment.
C) The bondholder must sell the bond immediately.
D) The bond issuer will pay additional interest.
Answer: B) The bondholder is not entitled to the next interest payment.
Explanation: When a bond goes ex-dividend, buyers of the bond are not entitled to the upcoming interest payment. The seller retains the right to this payment if they owned the bond before the ex-dividend date.
Why is creating a bond index more challenging than creating an equity index?
A) Bonds are less liquid than equities.
B) Bond maturities and issuers vary significantly.
C) Bonds have complex features such as calls and convertibility.
D) All of the above.
Answer: D) All of the above.
Explanation: Bond indices are more complex because bonds are less liquid, have a larger universe with varying maturities, and include unique features like calls or sinking funds, making it difficult to replicate and maintain accurate indices.
What happens if an investor buys a bond “cum-dividend”?
A) The investor pays additional accrued interest.
B) The investor receives interest from the settlement date onwards.
C) The investor becomes entitled to the next interest payment.
D) The bond price is adjusted downwards for accrued interest.
Answer: C) The investor becomes entitled to the next interest payment.
Explanation: Buying cum-dividend (Latin for “with dividend”) means the investor is entitled to the entire forthcoming interest payment, even if some of it accrued before their purchase.
What is the primary purpose of bond indices?
A) To predict future bond prices.
B) To measure performance in portfolio management.
C) To classify bonds based on their risk level.
D) To determine interest rates for new bond issuances.
Answer: B) To measure performance in portfolio management.
Explanation: Bond indices provide a benchmark for evaluating the performance of bond portfolios, measuring both income (interest) and capital appreciation.
What are the two types of returns included in total return bond indices?
A) Inflation adjustment and market risk.
B) Income and capital appreciation.
C) Liquidity and default risk.
D) Interest and bid-ask spread.
Answer: B) Income and capital appreciation.
Explanation: Total return indices account for the interest earned (income) and the change in the bond’s market price (capital appreciation) over time.
What is a common characteristic of most bond indices?
A) They are weighted by total issuance value.
B) They only include government bonds.
C) They exclude bonds with maturity over 10 years.
D) They account for inflation rates.
Answer: A) They are weighted by total issuance value.
Explanation: Most bond indices give greater weight to bonds with higher total issuance, meaning issuers with larger debt levels have a bigger influence on the index.
What is the Bloomberg Global Aggregate Bond Index?
A) A local index focusing on U.S. corporate bonds.
B) A global index including various types of bonds such as government and asset-backed securities.
C) An index exclusively for government-issued bonds.
D) An index tracking only emerging market bonds.
Answer: B) A global index including various types of bonds such as government and asset-backed securities.
Explanation: This index measures the performance of a broad range of global bonds, including government, corporate, and asset-backed securities.
What is the impact of the largest bond in a bond index?
A) It has no influence on the index value.
B) It has a smaller impact compared to smaller bonds.
C) A 1% change in its price affects the index more than smaller bonds.
D) It is removed from the index if its price changes frequently.
Answer: C) A 1% change in its price affects the index more than smaller bonds.
Explanation: Since bond indices are often issuance-weighted, the largest bond (in terms of total issuance) has a proportionally larger impact on the overall index value.
Which of the following is NOT included in the fundamentals of bond indices?
A) Average coupon
B) Average market capitalization
C) Average time to maturity
D) Average convexity
Answer: B) Average market capitalization
Explanation: Bond indices include calculations such as average coupon, gross redemption yield, time to maturity, Macaulay duration, modified duration, convexity, and others. Market capitalization, which is typically associated with equities, is not included.
How are the prices used for calculating capital and total return indices determined?
A) Based on the highest bid price available
B) By using the arithmetic mean between bid and ask quotes
C) By relying solely on the ask price provided by dealers
D) By taking the lowest price available in the market
Answer: B) By using the arithmetic mean between bid and ask quotes
Explanation: The calculation of bond indices is based on mid-prices, which are derived by averaging the bid and ask quotes, ensuring the prices are unbiased and representative of the market.
What is one primary advantage of investing in bond funds over individual bonds?
A) Higher interest rates compared to individual bonds
B) Access to a diversified portfolio with lower initial investment
C) Guaranteed protection against inflation
D) Elimination of price volatility
Answer: B) Access to a diversified portfolio with lower initial investment
Explanation: Bond funds pool money from many investors, allowing access to a diversified portfolio of bonds at a lower cost. This reduces risk and provides liquidity compared to individual bond investments.
Which strategy involves buying bonds with a range of different maturities to reduce interest rate risk?
A) Laddering
B) Bullet portfolios
C) Barbell portfolios
D) Duration matching
Answer: A) Laddering
Explanation: Laddering spreads bond investments across different maturities, reducing sensitivity to interest rate changes while providing flexibility as each bond matures.
What is the main goal of an “immunisation” strategy in bond investing?
A) To profit from short-term price changes in bonds
B) To match the duration of a bond portfolio with liabilities
C) To invest in bonds with the highest yields available
D) To switch between government and corporate bonds
Answer: B) To match the duration of a bond portfolio with liabilities
Explanation: Immunisation is a strategy where the portfolio duration is matched to liabilities, ensuring that changes in interest rates do not impact the ability to meet those liabilities.
What is a disadvantage of bonds compared to equities?
A) Bonds offer lower volatility than equities
B) Bonds provide regular income streams
C) Bonds typically have lower long-term returns than equities
D) Bonds are protected from inflation risk
Answer: C) Bonds typically have lower long-term returns than equities
Explanation: Although bonds are generally less volatile and safer, their returns over the long term are lower than those of equities, which have greater growth potential.
What is a characteristic of riding the yield curve as a bond strategy?
A) Buying bonds with maturities equal to liabilities
B) Purchasing bonds with varying durations to reduce risk
C) Buying long-term bonds and selling them before maturity to profit from declining yields
D) Switching between government and corporate bonds
Answer: C) Buying long-term bonds and selling them before maturity to profit from declining yields
Explanation: Riding the yield curve involves buying longer-term bonds and selling them at a profit before maturity when the yield curve is upward sloping and yields decline.
Why might an investor choose a bond fund over directly investing in individual bonds?
A) Bond funds have no associated management fees
B) Bond funds eliminate all investment risks
C) Bond funds offer greater liquidity and risk diversification
D) Bond funds provide tax-free returns
Answer: C) Bond funds offer greater liquidity and risk diversification
Explanation: Bond funds pool investments, enabling diversification and maintaining liquidity by holding cash reserves for redemption requests, which individual bonds may not provide.
Which of the following is a key feature of a bullet portfolio strategy?
A) Investments in bonds with a range of maturities
B) Investments focused on bonds with durations close to liabilities
C) Equal investments in short- and long-term bonds
D) A hybrid approach of immunisation and cash flow matching
Answer: B) Investments focused on bonds with durations close to liabilities
Explanation: A bullet portfolio strategy involves investing in bonds with durations close to specific liabilities, ensuring funds are available when needed.
What does “anomaly switching” in bond strategies involve?
A) Buying bonds with varying maturities
B) Switching from high-yield bonds to safer government bonds
C) Exploiting pricing differences between two similar bonds
D) Replacing short-duration bonds with long-duration bonds
Answer: C) Exploiting pricing differences between two similar bonds
Explanation: Anomaly switching takes advantage of pricing discrepancies between bonds that are otherwise similar in characteristics like maturity and credit rating.
What was the primary function of the bond market before the 1970s?
a) Speculative trading of bonds for profit
b) Financing government and large company activities
c) Hedging against economic downturns
d) Supporting ESG-related investments
Answer: b) Financing government and large company activities
Explanation: Before the 1970s, the bond market was mainly used by governments and large companies to borrow money to finance their activities or keep the economy running. Speculative trading became more prominent later.
Why did bonds experience more frequent price changes starting in the 1970s and 1980s?
a) Increased use by insurance companies
b) Higher inflation rates
c) Growing interest in secondary market trading
d) Introduction of green and blue bonds
Answer: c) Growing interest in secondary market trading
Explanation: As investors began to realize they could make profits by trading bonds in the secondary market, there was an increased need for greater and more frequent price changes to facilitate trading.
What is a reason investors may buy bonds with negative yields?
a) The expectation of yields becoming more positive
b) The potential for price appreciation as yields become even more negative
c) Bonds with negative yields are less risky
d) Negative-yield bonds offer higher returns over time
Answer: b) The potential for price appreciation as yields become even more negative
Explanation: Because of the inverse relationship between yields and prices, investors might profit from a bond’s price increase if its yield becomes even more negative.
Which of the following is NOT a primary reason investors buy bonds today?
a) Generating an income
b) Speculative short-term trading
c) Portfolio diversification
d) Hedging against economic downturns
Answer: b) Speculative short-term trading
Explanation: While speculative trading exists, the main reasons for buying bonds include generating income, preserving or appreciating capital, diversification, and hedging against economic downturns.
What is a “greenium” in the context of green bonds?
a) A discount on green bonds compared to conventional bonds
b) A premium at which green bonds trade compared to conventional bonds
c) The interest rate on green bonds
d) A measure of environmental impact
Answer: b) A premium at which green bonds trade compared to conventional bonds
Explanation: Green bonds often trade at a premium (greenium) due to high demand and limited supply, even though they have the same credit risk as their conventional counterparts.
What is the primary difference between green, social, and sustainability-linked bonds (SLBs)?
a) Only SLBs are backed by the ICMA Principles
b) SLBs are more flexible in how proceeds are used
c) Social bonds focus solely on environmental benefits
d) Sustainability bonds have no ESG criteria
Answer: b) SLBs are more flexible in how proceeds are used
Explanation: Unlike green and social bonds, which have strict criteria on how proceeds must be used, SLBs allow proceeds to be used for general purposes while requiring issuers to commit to sustainability goals.
What is one of the major barriers to investing in green and other sustainable bonds?
a) Lack of investor interest
b) Lack of liquidity in primary and secondary markets
c) Higher yields compared to conventional bonds
d) Poor credit ratings
Answer: b) Lack of liquidity in primary and secondary markets
Explanation: The relatively small size of the sustainable bond market compared to the overall bond universe makes it harder to enter and exit positions, though this is improving as the market grows.
What do Social Bonds typically fund?
a) Projects with environmental objectives
b) General corporate activities
c) Social projects like affordable housing and health services
d) High-yield corporate ventures
Answer: c) Social projects like affordable housing and health services
Explanation: Social bonds are used to fund projects with social objectives, such as basic infrastructure, health services, and affordable housing, particularly for those below the poverty line.
What is the primary function of the bond market for issuers?
A) To hedge against inflation
B) To fund large-scale projects and operations
C) To increase shareholder profits
D) To avoid taxation
Answer: B) To fund large-scale projects and operations
Explanation: The primary function of the bond market for issuers is to raise capital for financing large-scale projects or operations, as bonds provide an alternative to equity financing.
What are equities also commonly referred to as?
A) Loan stock
B) Ordinary shares or common stock
C) Bonds
D) Debentures
Answer: B) Ordinary shares or common stock
Explanation: Equities are also called ordinary shares or common shares. The term “equities” refers to the shares issued by a company representing ownership, while “ordinary shares” and “common stock” are used in different regions (e.g., ordinary shares in the UK, common stock in the US).
Which of the following is a key difference between bonds and equities?
A) Equities pay a fixed interest rate.
B) Bondholders are creditors, while shareholders are part-owners of the company.
C) Equities are repaid after a set maturity date.
D) Bondholders are entitled to voting rights in the company.
Answer: B) Bondholders are creditors, while shareholders are part-owners of the company.
Explanation: Bonds are debt securities, so bondholders are creditors and do not have ownership rights. Equities (shares) represent ownership in the company, making shareholders part-owners with rights attached to their ownership, such as voting.
Which of the following is true about shareholders’ risk compared to bondholders?
A) Shareholders have no financial risk.
B) Shareholders bear more risk because their returns are less predictable and their capital may become worthless.
C) Shareholders receive a fixed interest like bondholders.
D) Shareholders are guaranteed a repayment of their investment.
Answer: B) Shareholders bear more risk because their returns are less predictable and their capital may become worthless.
Explanation: Shareholders face higher risks than bondholders. If the company performs poorly, dividends may fall or be eliminated, and share prices may decrease. In extreme cases, shares could become worthless if the company faces liquidation, unlike bondholders who have a more secure claim on the company’s assets.
Which of the following best describes the income potential for an ordinary shareholder?
A) Income is guaranteed regardless of the company’s performance.
B) Shareholders earn interest payments similar to bondholders.
C) Shareholders can receive income from dividends, which depend on company profits.
D) Shareholders are not entitled to any income from the company.
Answer: C) Shareholders can receive income from dividends, which depend on company profits.
Explanation: Ordinary shareholders may receive income through dividends, but these payments depend on the company’s profits. If a company performs well, dividends may rise; if not, dividends may fall or be omitted altogether.
How can an ordinary shareholder buy shares in a company?
A) Through secondary market transactions, by purchasing existing shares.
B) Only during the initial public offering (IPO).
C) Through private sales with the company directors.
D) By borrowing shares from other investors.
Answer: A) Through secondary market transactions, by purchasing existing shares.
Explanation: Ordinary shareholders can buy shares either during the primary market through an IPO (newly issued shares) or in the secondary market, where existing shares are traded between investors. The company itself does not receive any funds from secondary market transactions.
What happens if a company is liquidated and the shareholders are not paid?
A) They will receive full compensation before bondholders.
B) They are the last to be paid, after creditors and bondholders.
C) They are guaranteed repayment based on their shareholding.
D) They are paid before the company’s creditors.
Answer: B) They are the last to be paid, after creditors and bondholders.
Explanation: In liquidation, ordinary shareholders are the last to receive any payout after the company’s liabilities, including payments to bondholders, have been settled. In many cases, there may be no funds left for shareholders once all debts are cleared.
What do ordinary shareholders hope for in their investment?
A) Guaranteed return with no risk.
B) Capital growth and steady dividends.
C) Fixed returns like bondholders.
D) No risk of capital loss.
Answer: B) Capital growth and steady dividends.
Explanation: Ordinary shareholders invest with the expectation that their shares will grow in value (capital growth) and that they will receive dividends if the company performs well. The potential for high rewards is offset by the associated risks, as there is no guarantee of returns.
Which of the following best describes a company’s ordinary share capital?
A) It is paid back after a certain period, like bonds.
B) It is the primary source of debt funding for the company.
C) It represents the owners’ stake in the company and is generally permanent.
D) It is a short-term liability of the company.
Answer: C) It represents the owners’ stake in the company and is generally permanent.
Explanation: Ordinary share capital represents the ownership stake of shareholders and is generally permanent, unlike bonds, which are redeemed at maturity. Share capital is used by companies to fund their operations and growth.
What is a key characteristic of redeemable shares?
A) They cannot be repurchased by the company.
B) They must be bought back from shareholders after a specified date or event.
C) They cannot be issued without approval from the shareholders.
D) They are only issued to company executives.
Answer: B) They must be bought back from shareholders after a specified date or event.
Explanation: Redeemable shares are issued with an agreement to buy them back from shareholders after a certain date or at a specified future event. This is a defining feature that distinguishes them from other types of shares.
What is required for a company to issue redeemable shares?
A) A shareholder vote.
B) A provision in the company’s articles of association.
C) Approval from regulatory authorities.
D) A specified share price at issuance.
Answer: B) A provision in the company’s articles of association.
Explanation: A company can only issue redeemable shares if its articles of association provide for it. The articles will also outline the terms of redemption, including the redemption date and price.
How are redeemable shares typically redeemed?
A) By issuing new shares to the public or from distributable profits.
B) By a vote of the ordinary shareholders.
C) From the sale of company assets.
D) Using debt financing from external investors.
Answer: A) By issuing new shares to the public or from distributable profits.
Explanation: Redeemed shares are repurchased and cancelled by the company, typically using funds from either new shares issued to the public or from distributable profits.
What is the main difference between redeemable shares and dual-class shares?
A) Redeemable shares offer different dividend rates, while dual-class shares do not.
B) Dual-class shares offer different voting rights, while redeemable shares do not.
C) Redeemable shares have limited voting rights, while dual-class shares do not.
D) Dual-class shares are only issued to investors, while redeemable shares are only issued to employees.
Answer: B) Dual-class shares offer different voting rights, while redeemable shares do not.
Explanation: Dual-class shares are structured to provide different voting rights to different classes of shareholders (e.g., public vs. founders), whereas redeemable shares are distinguished by their buyback agreement rather than voting rights.
What is the main purpose of deferred dividend shares?
A) To provide immediate returns to investors.
B) To allow holders to receive dividends as soon as they are issued.
C) To defer dividend payments until a specific condition is met.
D) To ensure holders receive a higher dividend than ordinary shareholders.
Answer: C) To defer dividend payments until a specific condition is met.
Explanation: Deferred dividend shares have dividends that are not paid immediately but are instead deferred until a certain condition (like a time period) is fulfilled. This structure is designed to benefit investors interested in capital growth.
Who typically holds deferred ordinary shares?
A) External investors seeking high returns.
B) The company’s founders or executives.
C) Preference shareholders looking for immediate dividends.
D) Ordinary shareholders voting on company decisions.
Answer: B) The company’s founders or executives.
Explanation: Deferred ordinary shares are usually issued to the founders or executives of a company. These shares typically provide little or no dividends until certain conditions are met, but they offer a larger share of future profits.
What is the key feature of preference shares?
A) They have no dividends or liquidation rights.
B) They offer fixed dividends and priority over ordinary shareholders.
C) They provide voting rights on company decisions.
D) They are redeemable and can be repurchased at any time.
Answer: B) They offer fixed dividends and priority over ordinary shareholders.
Explanation: Preference shares typically offer fixed dividends and priority in both dividend payments and liquidation scenarios, providing holders with more security than ordinary shareholders.
Which type of preference shares accumulates unpaid dividends for future payment?
A) Non-cumulative preference shares.
B) Participating preference shares.
C) Cumulative preference shares.
D) Convertible preference shares.
Answer: C) Cumulative preference shares.
Explanation: Cumulative preference shares accumulate any unpaid dividends and ensure that the missed dividends are paid before any dividends are issued to ordinary shareholders.
What happens when a company redeems its preference shares?
A) The shareholders are given a higher dividend.
B) The preference shares are cancelled, and the company pays the shareholders for the shares.
C) The preference shareholders are converted to ordinary shareholders.
D) The company issues new shares to replace the redeemed shares.
Answer: B) The preference shares are cancelled, and the company pays the shareholders for the shares.
Explanation: When preference shares are redeemed, the company repurchases the shares, paying the holders the nominal value (or agreed-upon amount), and the redeemed shares are then cancelled, reducing the company’s issued share capital.
What does the private equity market primarily provide capital for?
A) Investing in publicly traded companies
B) Investing in unquoted companies
C) Investing in government bonds
D) Purchasing stocks in large-cap companies
Answer: B) Investing in unquoted companies
Context: Private equity focuses on providing capital to invest in unquoted companies, which may include public companies that are delisted as part of the transaction.
What is the key feature of convertible preference shares?
A) They provide dividends with no specified rate.
B) They allow the holder to convert the shares to ordinary shares.
C) They accumulate unpaid dividends for future payments.
D) They offer the highest priority in liquidation.
Answer: B) They allow the holder to convert the shares to ordinary shares.
Explanation: Convertible preference shares offer holders the right to convert their shares into ordinary shares at a future date, offering potential upside in the form of equity participation if the company performs well.
Which of the following is NOT a common private equity investment strategy?
A) Leveraged buyouts (LBOs)
B) Hedge fund investments
C) Venture capital (VC)
D) Growth capital
Answer: B) Hedge fund investments
Context: Hedge funds are often compared to private equity, but they are a distinct type of investment vehicle, with different organizational structures and strategies.
What is the primary benefit of a Leveraged Buyout (LBO) for a financial sponsor?
A) The sponsor must provide all the capital for the acquisition.
B) The sponsor’s risk is significantly increased.
C) The sponsor only needs to provide a fraction of the capital for the acquisition.
D) The sponsor does not need to take on any debt.
Answer: C) The sponsor only needs to provide a fraction of the capital for the acquisition.
Context: In an LBO, the financial sponsor raises acquisition debt, making the transaction attractive by allowing them to provide only a small portion of the capital needed. This is particularly appealing to investors.
Which of the following best describes Venture Capital (VC)?
A) Equity investments made in mature companies for expansion.
B) Equity investments in start-ups and early-stage companies.
C) Debt investments made in distressed companies.
D) Equity investments in large-cap companies.
Answer: B) Equity investments in start-ups and early-stage companies.
Context: VC is focused on providing capital to companies in their early stages, especially for new technology, marketing concepts, or products that are not yet proven.
What is Growth Capital primarily used for?
A) To fund the launch of new start-up companies.
B) To acquire companies with a change of control.
C) To expand or restructure relatively mature companies.
D) To rescue distressed companies from bankruptcy
Answer: C) To expand or restructure relatively mature companies.
Context: Growth capital is used by more mature companies seeking to expand, enter new markets, or finance acquisitions without giving up control.
What is a characteristic risk of Distressed Investments?
A) They have low potential for high returns.
B) They are primarily associated with young companies.
C) They may carry high risks of bankruptcy.
D) They always lead to guaranteed returns.
Answer: C) They may carry high risks of bankruptcy.
Context: Distressed investments are often made in companies that are financially stressed, facing bankruptcy, or operational distress, making them risky but potentially rewarding if recovery occurs.
Mezzanine Capital is typically used for which of the following?
A) To acquire companies without debt.
B) To reduce the amount of equity needed for an acquisition.
C) To finance very early-stage businesses.
D) To provide financing to companies in financial distress.
Answer: B) To reduce the amount of equity needed for an acquisition.
Context: Mezzanine capital provides subordinated debt or preferred equity, filling the gap between debt and equity financing, often used in leveraged buyouts and major expansions.
What type of financing is described as interim and typically short-term (six to twelve months)?
A) Mezzanine Capital
B) Venture Capital
C) Bridge Financing
D) Growth Capital
Answer: C) Bridge Financing
Context: Bridge financing is a short-term solution that companies use to solidify their position until a longer-term financing arrangement can be made
Which of the following best describes liquidity in terms of investing in shares?
A) The ease with which an investor can sell shares in an illiquid market.
B) The amount of time it takes to generate income from shares.
C) The ease and speed with which an investment can be converted to cash.
D) The process of acquiring shares from private companies.
Answer: C) The ease and speed with which an investment can be converted to cash.
Context: Liquidity refers to how quickly an asset can be sold and converted into cash. Stocks in well-established companies (blue-chip stocks) are typically more liquid, while smaller stocks may be less so.
What is one key difference between liquid and illiquid shares?
A) Liquid shares are only sold by private companies.
B) Illiquid shares are easier to sell at fair market value.
C) Liquid shares are more frequently traded, with more buyers and sellers.
D) Illiquid shares are always more expensive to purchase.
Answer: C) Liquid shares are more frequently traded, with more buyers and sellers.
Context: Liquid shares, like those of blue-chip companies, have a deeper and more active market, meaning they can be bought and sold more easily compared to illiquid shares, which may take longer to trade or are harder to value.
What is the primary purpose of a credit rating?
a) To assess a company’s profit margins
b) To determine a company’s potential for defaulting on debts
c) To calculate the number of shares a company has issued
d) To track the performance of a company’s stock market price
Answer: b) To determine a company’s potential for defaulting on debts
Explanation: A credit rating assesses a company’s creditworthiness, which measures the likelihood of the company defaulting on its debts. This provides investors with insight into the company’s health and future prospects.
In the context of bonus issues, what happens to a company’s net worth after the issuance of additional shares?
a) The net worth decreases due to the dilution of shares
b) The net worth remains unchanged, though the distribution of shareholders’ funds changes
c) The net worth increases as more capital is raised
d) The net worth decreases because the company must raise new money
Answer: b) The net worth remains unchanged, though the distribution of shareholders’ funds changes
Explanation: A bonus issue increases the number of shares in issue but does not raise new capital. The net worth of the company remains the same, but the shareholders’ funds are redistributed between share capital and other reserves.
How does a bonus issue affect the market price of a company’s shares?
a) The share price typically rises in direct proportion to the increase in share capital
b) The share price typically falls in direct proportion to the increase in share capital
c) The share price remains unchanged
d) The share price may increase due to the positive market perception of the bonus issue
Answer: b) The share price typically falls in direct proportion to the increase in share capital
Explanation: After a bonus issue, the share price typically falls in direct proportion to the increase in the number of shares. However, other factors such as market perception and increased accessibility may influence the price, potentially causing it to rise slightly above the expected value.
What is a share split, and how does it differ from a bonus issue?
a) A share split reduces the total nominal share capital while increasing the market price
b) A share split reduces the nominal (par) value per share, but the total nominal share capital remains unchanged
c) A share split increases the total capital raised without altering the number of shares in issue
d) A share split is the same as a bonus issue
Answer: b) A share split reduces the nominal (par) value per share, but the total nominal share capital remains unchanged
Explanation: In a share split, the nominal (par) value per share is reduced without altering the total nominal share capital. This differs from a bonus issue, where new shares are issued to existing shareholders, but the total value of shares does not change.
Why might a company perform a bonus issue?
a) To raise new capital from shareholders
b) To simplify its statement of financial position and improve marketability
c) To reduce its share capital
d) To pay off outstanding debts
Answer: b) To simplify its statement of financial position and improve marketability
Explanation: Companies may issue bonus shares to simplify their financial position and improve marketability. Increasing the number of shares can make them more accessible to a broader range of investors and signal financial health if there are ample reserves to allocate.
What is a rights issue, and why would a company consider using it?
A) To raise money by issuing new bonds
B) To allow existing shareholders to buy new shares at a discounted price
C) To pay off debts without issuing new shares
D) To raise capital through a public offering of shares
Answer: B) To allow existing shareholders to buy new shares at a discounted price
Explanation: A rights issue allows existing shareholders to purchase additional shares at a price below the current market value. Companies use rights issues to raise capital for various purposes, such as paying off debt, supporting expansion, or funding acquisitions.
What is the key benefit of a rights issue for existing shareholders?
A) They can purchase new shares without paying for them
B) They can avoid dilution of their ownership in the company
C) They are guaranteed a profit from the new shares
D) They receive dividends from the newly issued shares immediately
Answer: B) They can avoid dilution of their ownership in the company
Explanation: A rights issue protects existing shareholders from having their ownership stake diluted by new investors. It gives them the legal right to purchase additional shares, ensuring their percentage of ownership can remain the same.
How is the subscription price for new shares in a rights issue typically set?
A) It is set higher than the current market value to attract new investors
B) It is set equal to the market value of the shares
C) It is set below the current market value to encourage existing shareholders to invest
D) It is set based on the company’s debt obligations
Answer: C) It is set below the current market value to encourage existing shareholders to invest
Explanation: The subscription price for new shares in a rights issue is typically set below the current market value of the shares to make the offer attractive to existing shareholders. This incentivizes them to invest further in the company.
What does the acronym TERP stand for, and what does it represent?
A) Total Earnings Return Price, representing the total expected earnings from the issue
B) Theoretical Ex-Rights Price, representing the expected price of shares after the rights issue
C) Total Equity and Return Price, showing the company’s overall market equity after the issue
D) Transaction Equity Rights Price, showing the market value of all shares after the issue
Answer: B) Theoretical Ex-Rights Price, representing the expected price of shares after the rights issue
Explanation: TERP is the theoretical price at which the company’s old and new shares will trade once the rights issue is completed and all new shares are fully paid. It provides an estimate of what the share price will be after the rights issue.
What does underwriting in a rights issue entail?
A) Guaranteeing that all shareholders will receive the exact number of shares they request
B) Ensuring the company will not have to pay any costs for the rights issue
C) A financial institution agreeing to purchase any shares not taken up by existing shareholders
D) Allowing investors to borrow money to purchase additional shares
Answer: C) A financial institution agreeing to purchase any shares not taken up by existing shareholders
Explanation: Underwriting is a process where a financial institution agrees to purchase any shares that existing shareholders do not take up in a rights issue. This ensures the company raises the intended capital even if some shareholders do not participate.
What happens to the price of shares after a rights issue is completed?
A) The price of both old and new shares is expected to rise significantly
B) The price of old shares typically falls, and the price of new shares rises to the TERP
C) The price of shares stays the same, regardless of the issue
D) The price of both old and new shares falls drastically
Answer: B) The price of old shares typically falls, and the price of new shares rises to the TERP
Explanation: After the rights issue, the price of the old shares generally falls to reflect the dilution caused by the issuance of new shares. The new shares are expected to rise to the TERP, which is the weighted average price of the old and new shares combined.
Which of the following is NOT a reason why a company might issue a rights issue?
A) To acquire funds for expansion
B) To acquire funds for paying off debt at higher interest rates
C) To reward shareholders with free shares
D) To acquire funding for an acquisition
Answer: C) To reward shareholders with free shares
Explanation: A rights issue is used to raise capital for the company, not to reward shareholders with free shares (which would be done through a bonus issue). The funds raised might be used for expansion, paying off debt, or acquiring other companies.
What is the main difference between a rights issue and a bonus issue?
A) A rights issue raises new capital for the company, while a bonus issue does not
B) A rights issue increases the number of shares without diluting existing shareholders’ equity, while a bonus issue does not affect share numbers
C) A bonus issue raises capital by selling shares to the market, while a rights issue offers shares at no cost
D) There is no difference; both are used for the same purposes
Answer: A) A rights issue raises new capital for the company, while a bonus issue does not
Explanation: The key difference is that a rights issue raises new capital by selling new shares to existing shareholders, while a bonus issue does not raise new capital. In a bonus issue, new shares are distributed for free to existing shareholders based on the number of shares they already own.
In a liquidation, what is the correct order of priority for repaying debts and shareholders?
A) Preference shareholders, unsecured bondholders, secured bondholders, ordinary shareholders
B) Secured bondholders, unsecured bondholders, preference shareholders, ordinary shareholders
C) Ordinary shareholders, preference shareholders, unsecured bondholders, secured bondholders
D) Unsecured bondholders, ordinary shareholders, secured bondholders, preference shareholders
Answer: B) Secured bondholders, unsecured bondholders, preference shareholders, ordinary shareholders
Explanation: In the event of a liquidation, the assets are distributed in a specific order. Secured creditors, such as bondholders with secured debt, are paid first, followed by unsecured bondholders, preference shareholders, and finally ordinary shareholders, who are last in line for any remaining funds.
What is the typical effect on a company’s share price when it enters liquidation?
A) The share price rises significantly due to the company’s liquidation value
B) The share price remains stable, as it is unaffected by liquidation
C) The share price often falls due to the uncertainty about asset distribution and solvency
D) The share price increases if the company is liquidated voluntarily
Answer: C) The share price often falls due to the uncertainty about asset distribution and solvency
Explanation: When a company enters liquidation, the market typically reacts negatively, especially if the company is insolvent, as there is uncertainty about how much of the company’s debts will be repaid and whether shareholders will receive anything. The share price often falls as a result.
What distinguishes shareholder engagement from shareholder activism?
A) Shareholder engagement focuses on short-term gains, while shareholder activism aims for long-term improvements.
B) Shareholder engagement relies on communication and trust, whereas shareholder activism favours short-term gains at the expense of long-term interests.
C) Shareholder activism involves formal dialogue and collaboration with management, while shareholder engagement uses litigation.
D) Shareholder activism focuses solely on financial goals, while shareholder engagement targets non-financial goals.
Answer: B) Shareholder engagement relies on communication and trust, whereas shareholder activism favours short-term gains at the expense of long-term interests.
Context: Shareholder engagement is typically a long-term strategy built around communication and mutual trust, while shareholder activism focuses on achieving more immediate outcomes, sometimes at the cost of the company’s long-term success.
Which of the following is most likely to cause a drop in share prices?
A) Strong financial results and a positive economic outlook.
B) An increase in the supply of shares compared to demand.
C) A stable political climate and no rumours of mergers or takeovers.
D) High investor confidence and expectations of future growth.
Answer: B) An increase in the supply of shares compared to demand.
Context: When there are more shares available than there are buyers, share prices tend to fall due to an oversupply in the market.
Which of the following statements about equity share price volatility is true?
A) Equity prices are always stable due to long-term growth expectations.
B) Share prices are unaffected by market demand and supply dynamics.
C) Share prices are driven by both company performance and market sentiment.
D) Share prices only fluctuate based on government regulations.
Answer: C) Share prices are driven by both company performance and market sentiment.
Context: Share prices fluctuate due to both the company’s financial health and external factors like market sentiment, economic conditions, and investor behavior.
What is the primary function of a stockbroker when dealing in shares?
A) To provide advice to clients on how to manage their finances.
B) To place orders for shares on behalf of the client and ensure the transaction goes through a stock exchange.
C) To make the final decision on investment choices for the client.
D) To manage the long-term performance of a client’s portfolio.
Answer: B) To place orders for shares on behalf of the client and ensure the transaction goes through a stock exchange.
Context: A stockbroker’s job is to execute buy and sell orders on behalf of clients, ensuring the transaction goes through an exchange for matching buyers and sellers.
Which of the following is NOT a factor affecting the price of shares?
A) Strong financial results from the company.
B) The political climate and government policy.
C) The value of the company’s physical assets.
D) Market sentiment and investor confidence.
Answer: C) The value of the company’s physical assets.
Context: While the company’s financial performance, political environment, and market sentiment play a significant role in share price fluctuations, the value of physical assets does not directly affect the share price as strongly. Share prices are more influenced by expectations of future performance, management, and market conditions.
Which of the following types of stockbroking services allows the client to make the final decision on investment deals?
A) Discretionary service
B) Execution-only service
C) Non-discretionary advisory service
D) Both B and C
Answer: D) Both B and C
Context: Both execution-only and non-discretionary advisory services allow the client to make the final decision. In an advisory service, the broker gives advice, but the client decides. In execution-only, the broker only executes the transaction per the client’s instructions.
What is the primary role of brokers in the financial markets?
A) To offer liquidity by constantly quoting prices in securities
B) To act as their clients’ agent, executing deals at the best possible price
C) To manage a stock exchange’s order book
D) To settle transactions between buyers and sellers
Answer: B) To act as their clients’ agent, executing deals at the best possible price
Explanation: Brokers are intermediaries who act on behalf of their clients, seeking the best possible prices when executing their orders in the market. They ensure that trades are placed at the best available prices, following the principle of best execution.
What is the function of market makers in the financial markets?
A) They act as the central depository for securities
B) They ensure there is always a market in certain securities by quoting buy and sell prices
C) They execute trades on behalf of brokers
D) They determine the settlement period for equity trades
Answer: B) They ensure there is always a market in certain securities by quoting buy and sell prices
Explanation: Market makers provide liquidity by quoting both buy and sell prices in certain securities, ensuring that there is always a market for those securities. They compete with one another to offer the best prices to brokers and investors.
Which trading platform is used for securities that are less liquid than those on the SETS service in the UK?
A) SETS
B) SETqx
C) SEAQ
D) International Order Book (IOB)
Answer: B) SETqx
Explanation: SETqx is used for trading less liquid securities compared to those available on the SETS platform. It provides a service for securities that may not have the same level of trading volume or liquidity as those on SETS.
What does the CREST system in the UK provide?
A) A system for issuing bonds and international stocks
B) A central securities depository that tracks ownership electronically
C) A platform for trading fixed-interest market securities
D) A service for market makers to quote prices
Answer: B) A central securities depository that tracks ownership electronically
Explanation: CREST is a central securities depository in the UK that tracks ownership of securities electronically, facilitating the settlement of transactions without the need for physical certificates.
What is the standard market convention for equity trades in the UK?
A) Settlement occurs immediately (T+0)
B) Settlement occurs one day after the trade (T+1)
C) Settlement occurs two days after the trade (T+2)
D) Settlement occurs three days after the trade (T+3)
Answer: C) Settlement occurs two days after the trade (T+2)
Explanation: In the UK, equity trades generally settle on a T+2 basis, meaning the buyer and seller exchange funds and securities within two business days of the trade.
What is a ‘premium’ in the context of issuing shares?
A) The nominal value of a share
B) The market value of a share
C) The excess price per share over the nominal value
D) The total value of a company’s shares
Answer: C) The excess price per share over the nominal value
Explanation: A premium is the amount by which the price at which shares are sold exceeds their nominal value. This occurs when a company issues shares at a price higher than their par or nominal value.
What is the Declaration Date for dividends?
A) The date when investors must purchase the stock to receive the dividend.
B) The date the company’s board of directors announces the dividend.
C) The date an investor receives the dividend payment.
D) The date the company records shareholders for dividend purposes.
Answer: B) The date the company’s board of directors announces the dividend.
Explanation: The Declaration Date is when the board of directors formally announces the dividend and makes it a liability for the company.
How is the fair value of a share typically calculated?
A) By analysing its market price
B) Using the Gordon growth model based on expected dividends
C) By comparing it to similar companies in the market
D) Based on the company’s total market capitalisation
Answer: B) Using the Gordon growth model based on expected dividends
Explanation: The Gordon growth model, also known as the dividend valuation model, calculates the fair value of a share by considering the expected future dividends, their growth rate, and the required return.
What might investors consider if a company does not currently pay dividends but has a high stock market valuation?
A) The company’s large current dividends
B) The future potential for significant dividends
C) The company’s market sentiment
D) The company’s market liquidity
Answer: B) The future potential for significant dividends
Explanation: If a company does not pay dividends but has a high valuation, investors often believe the company will start paying significant dividends in the future. For example, companies like Microsoft and Apple eventually paid dividends after reinvesting their earnings for many years.
What does the term “Ex-Dividend Date” mean?
A) The date by which an investor must be registered as an owner of the shares.
B) The date when the company officially pays the dividend.
C) The date by which investors must have purchased the stock to receive the dividend.
D) The date the company’s board of directors announces the dividend.
Answer: C) The date by which investors must have purchased the stock to receive the dividend.
Explanation: On the Ex-Dividend Date (xd), an investor must have purchased the stock to be eligible for the dividend. If bought after this date, they won’t receive the upcoming dividend.
What happens to the share price on the Ex-Dividend Date?
A) It increases by the dividend amount.
B) It decreases by the dividend amount.
C) It remains unaffected by the dividend.
D) It fluctuates based on investor demand.
Answer: B) It decreases by the dividend amount.
Explanation: On the Ex-Dividend Date, the share price typically drops by the amount of the dividend, as new buyers are not entitled to the upcoming payment.
What is the Record Date (or Books Closed Date)?
A) The day the dividend is declared.
B) The last day to buy the stock and receive the dividend.
C) The day by which an investor must be registered as an owner to receive the dividend.
D) The day the dividend is paid to shareholders.
Answer: C) The day by which an investor must be registered as an owner to receive the dividend.
Explanation: The Record Date is when the company takes a record of all shareholders who will receive the dividend. It occurs after the Ex-Dividend Date.
What is a “special ex trade”?
A) A trade arranged where the buyer receives the dividend despite buying during the Ex-Dividend period.
B) A trade arranged where the buyer does not receive the dividend despite buying during the Cum-Dividend period.
C) A trade made on the Ex-Dividend Date that guarantees the buyer receives the dividend.
D) A trade that happens after the dividend is paid.
Answer: B) A trade arranged where the buyer does not receive the dividend despite buying during the Cum-Dividend period.
Explanation: A special ex trade is a special arrangement where the buyer does not receive the dividend, even though they bought the stock during the Cum-Dividend period.
What is a “special cum trade”?
A) A trade where the buyer receives the next dividend.
B) A trade arranged during the Ex-Dividend period where the buyer doesn’t receive the dividend.
C) A trade that takes place on the Record Date.
D) A trade that happens before the Ex-Dividend Date.
Answer: B) A trade arranged during the Ex-Dividend period where the buyer doesn’t receive the dividend.
Explanation: A special cum trade is a special arrangement where the buyer does not receive the dividend despite buying during the Ex-Dividend period.
What is meant by “Cum-Dividend”?
A) The day an investor will receive the dividend.
B) A trade that occurs after the Ex-Dividend Date.
C) Shares are bought with the right to receive the next dividend.
D) A special arrangement where the buyer doesn’t receive the dividend.
Answer: C) Shares are bought with the right to receive the next dividend.
Explanation: A stock is considered “Cum-Dividend” when an investor buys it with the right to receive the next declared dividend.
What is the typical commission charged by brokers when buying shares?
A) A flat fee only.
B) A percentage of the total purchase price.
C) A fixed commission based on the number of shares.
D) A fee for each dividend transaction.
Answer: B) A percentage of the total purchase price.
Explanation: Broker commission is typically a percentage of the total purchase price, often ranging from 1% to 2%, but it can also be a flat fee or a combination of both.
What is the Panel of Takeovers and Mergers (PTM) Levy?
A) A fee for shares traded on the London Stock Exchange over £10,000.
B) A tax on dividends paid to shareholders.
C) A commission charged by brokers for transactions over £10,000.
D) A government fee charged to investors buying stocks under £10,000.
Answer: A) A fee for shares traded on the London Stock Exchange over £10,000.
Explanation: The PTM Levy is a £1 government fee charged on securities transactions over £10,000 on the London Stock Exchange, Isle of Man, or the Channel Islands.
What is a world or global stock market index?
A) An index that tracks large-cap stocks from a specific country.
B) An index that includes large companies without regard for their domicile or trading location.
C) An index that only tracks companies in emerging markets.
D) An index that tracks the performance of small-cap companies globally.
Answer: B) An index that includes large companies without regard for their domicile or trading location.
Explanation: World or global stock market indices, such as the MSCI World or S&P Global 100, include large companies from various countries and regions, without focusing on where they are domiciled or traded.
Question: What is the primary purpose of a national stock market index?
A) To track multinational companies across borders.
B) To represent the performance of a nation’s stock market and reflect its economic health.
C) To measure global stock market performance.
D) To track the performance of small-cap companies only within a nation.
Answer: B) To represent the performance of a nation’s stock market and reflect its economic health.
Explanation: National indices like the FTSE 100 or S&P 500 represent the performance of the stock market of a particular country, often serving as a barometer for economic health and investor sentiment.
What does the Dow Jones US Total Stock Market Index include?
A) Only the stocks of large multinational companies.
B) Stocks of nearly every publicly traded company in the US, excluding ADRs.
C) Only companies traded on the Nasdaq.
D) Only stocks of companies listed on the NYSE.
Answer: B) Stocks of nearly every publicly traded company in the US, excluding ADRs.
Explanation: The Dow Jones US Total Stock Market Index represents the stocks of nearly all publicly traded companies in the US, including those on the NYSE and most on Nasdaq, but it excludes American Deposit Receipts (ADRs).
Specialized stock market indices track the performance of:
A) All publicly traded companies globally.
B) Companies within specific sectors or industries.
C) Companies with the highest market capitalization.
D) Companies based on a specific country’s economy
Answer: B) Companies within specific sectors or industries.
Explanation: Specialized indices focus on specific sectors, such as pharmaceuticals or technology, and track the performance of companies within those industries.
Which of the following is a version of the S&P 500 index?
A) Price return
B) Revenue return
C) Market cap return
D) Dividend growth return
Answer: A) Price return
Explanation: The S&P 500 has multiple versions, including price return, which only considers the price movements of its components, excluding dividends. Other versions include total return and net total return, which account for dividends in different ways.
In a price-weighted index, how is the index value calculated?
A) Based on the market capitalization of the companies.
B) By summing the share prices of all constituent stocks.
C) Based on the total number of shares outstanding.
D) By equally weighting the companies in the index.
Answer: B) By summing the share prices of all constituent stocks.
Explanation: In a price-weighted index, such as the Dow Jones Industrial Average, the index value is determined by adding up the share prices of its components. Stocks with higher prices have a greater impact on the index.
What is the main characteristic of a market capitalisation-weighted index?
A) It gives equal weight to all stocks in the index.
B) It gives more weight to companies with a higher market capitalisation.
C) It focuses only on small-cap stocks.
D) It only tracks the performance of the top 10 companies in a market.
Answer: B) It gives more weight to companies with a higher market capitalisation.
Explanation: Market capitalisation-weighted indices, like the S&P 500, give greater weight to companies with higher market capitalisation, meaning they have a larger impact on the index value.
What is an equal-weighted index?
A) An index where the largest companies have more influence.
B) An index where all constituent stocks are equally weighted, regardless of their size.
C) An index that only includes stocks from large companies.
D) An index that excludes small-cap companies.
Answer: B) An index where all constituent stocks are equally weighted, regardless of their size.
Explanation: In an equal-weighted index, like the MSCI USA Equal Weighted Index, each stock is given the same weight in the index, regardless of its market size, which balances the influence of each company.
A float-adjusted index takes into account:
A) The total number of shares available in the market.
B) Only the shares that are freely tradable by investors.
C) Shares held by government and strategic investors.
D) The total market capitalization of a company.
Answer: B) Only the shares that are freely tradable by investors.
Explanation: Float-adjusted indices exclude shares held by strategic investors or government bodies, making them more accurate for reflecting what investors can actually trade.
What happens during the quarterly review of the FTSE 100?
A) The companies with the highest market cap are removed from the index.
B) Some companies may be added or removed based on their performance.
C) The index is split into smaller sub-indices.
D) The index is reweighted to give equal importance to all constituents.
Answer: B) Some companies may be added or removed based on their performance.
Explanation: During the quarterly review of the FTSE 100, companies are added or removed based on their market performance, which impacts share prices and requires fund managers to rebalance their portfolios.
What is the formula to calculate the Dividend Yield?
a) Dividend Yield = Gross Dividend Paid in Year / Market Price of Share
b) Dividend Yield = Market Price of Share / Gross Dividend Paid in Year
c) Dividend Yield = Earnings per Share / Market Price of Share
d) Dividend Yield = Gross Dividend Paid in Year / Total Assets
Answer: a) Dividend Yield = Gross Dividend Paid in Year / Market Price of Share
Explanation: The dividend yield is calculated by dividing the gross dividend paid in the year by the current market price of the share, expressed as a percentage. This gives investors an idea of the return they can expect from dividends relative to the share price.
What is the formula to calculate Earnings Per Share (EPS)?
a) EPS = Profit Attributable to Ordinary Shareholders / Number of Ordinary Shares
b) EPS = Net Profit / Number of Ordinary Shares
c) EPS = Total Revenue / Number of Ordinary Shares
d) EPS = Profit Attributable to Ordinary Shareholders / Total Assets
Answer: a) EPS = Profit Attributable to Ordinary Shareholders / Number of Ordinary Shares
Explanation: EPS is the amount of a company’s profits allocated to each outstanding share, calculated by dividing the profit attributable to ordinary shareholders by the total number of ordinary shares in issue.
What does a higher EPS indicate about a company?
a) The company is less profitable
b) The company has fewer shares in issue
c) The company is considered more profitable
d) The company is in financial difficulty
Answer: c) The company is considered more profitable
Explanation: A higher EPS indicates that a company is more profitable as it has generated more profit per share, making it an attractive prospect for investors seeking returns on their shares.
What does a high Price-to-Earnings (P/E) ratio suggest?
a) The company’s shares are likely undervalued
b) The company is expected to experience good profit growth
c) The company is in financial trouble
d) The company has a low market valuation
Answer: b) The company is expected to experience good profit growth
Explanation: A high P/E ratio may indicate that the market expects good profit growth or that the company is perceived to have low risk, as higher P/E ratios are often linked to higher expectations of future earnings.
What does a PEG ratio of less than one indicate?
a) The stock is overvalued
b) The stock is undervalued
c) The stock has no growth potential
d) The stock is priced appropriately
Answer: b) The stock is undervalued
Explanation: A PEG ratio below one suggests that the stock is undervalued relative to its projected earnings growth. It is considered a favorable indicator for investors seeking value opportunities.
How is Dividend Cover calculated?
a) Dividend Cover = Dividend Paid / Earnings Per Share (EPS)
b) Dividend Cover = EPS / Dividend Paid
c) Dividend Cover = Total Revenue / Dividend Paid
d) Dividend Cover = Operating Cash Flow / Dividend Paid
Answer: b) Dividend Cover = EPS / Dividend Paid
Explanation: Dividend Cover is calculated by dividing the earnings per share (EPS) by the dividend paid per share (DPS). A higher ratio suggests a safer dividend, as the company can more easily afford to pay it.
What is a typical dividend cover ratio that indicates the dividend is sustainable?
a) 0.5x
b) 1.0x
c) 2.0x or higher
d) 5.0x
Answer: c) 2.0x or higher
Explanation: A dividend cover ratio of 2.0x or higher indicates that the company is comfortably able to pay out its dividend, suggesting financial stability. A ratio below 1.5x may signal concerns about dividend sustainability.
How is the Price-to-Cash Flow (P/CF) ratio calculated?
a) P/CF = Market Price of Share / Cash Flow per Share
b) P/CF = Cash Flow per Share / Market Price of Share
c) P/CF = Market Price of Share / Earnings per Share
d) P/CF = Earnings per Share / Cash Flow per Share
Answer: a) P/CF = Market Price of Share / Cash Flow per Share
Explanation: The P/CF ratio compares the market price of a company’s shares to its cash flow per share. It helps investors assess whether a company’s stock is overvalued or undervalued relative to its ability to generate cash.
What does a low P/CF ratio suggest?
a) The stock is overvalued relative to its cash flow
b) The company is generating low cash flow
c) The stock is undervalued relative to its cash flow
d) The company is facing financial instability
Answer: c) The stock is undervalued relative to its cash flow
Explanation: A low P/CF ratio suggests that the stock may be undervalued compared to its cash flow, which can indicate that the company is being priced too low relative to its financial health.
What is the Price-to-Book (P/B) ratio used to assess?
a) The market value compared to the company’s earnings
b) The company’s stock relative to its cash flow
c) The market value relative to the book value of assets
d) The company’s dividend yield compared to other companies
Answer: c) The market value relative to the book value of assets
Explanation: The Price-to-Book (P/B) ratio compares the market value of a company’s stock to its book value. It is commonly used in sectors like banking to evaluate the value of a company’s assets after all liabilities have been accounted for.
What is the formula for calculating Net Asset Value (NAV) per share?
a) NAV = Assets + Liabilities
b) NAV per share = (Assets - Liabilities) / Number of shares in issue
c) NAV per share = (Market capitalization + Debt - Cash) / Number of shares in issue
d) NAV per share = (Assets - Liabilities) * Number of shares in issue
Answer: b) NAV per share = (Assets - Liabilities) / Number of shares in issue
Context: The NAV per share is derived from the total assets minus the total liabilities of a company, divided by the number of shares in circulation. This figure is useful for investors to assess the underlying value of a company and its financial health, especially in cases like liquidation.
How is Enterprise Value (EV) calculated?
a) EV = Market capitalization - Debt + Cash
b) EV = Market capitalization + Debt - Cash and cash equivalents
c) EV = Assets - Liabilities + Debt
d) EV = Debt + Cash - Market capitalization
Answer: b) EV = Market capitalization + Debt - Cash and cash equivalents
Context: The Enterprise Value (EV) gives an indication of what the market values a company’s ongoing business operations at, including debt and excluding cash, as it provides a clearer picture of a company’s true value for potential takeover purposes.
What does Return on Capital Employed (ROCE) exclude in its calculation?
a) Tax and interest
b) Only interest
c) Depreciation
d) Profit after tax
Answer: a) Tax and interest
Context: ROCE focuses on how efficiently a company uses its capital to generate profits, excluding financial obligations such as interest and tax. This allows for a more consistent comparison between companies, regardless of their financing structure.
What is Return on Equity (ROE) a measure of?
a) The amount of profit a company generates using its total assets
b) The return on the investment made by shareholders, represented as a percentage
c) The percentage of a company’s profits paid out as dividends
d) The total return from operations after tax and preferred dividends
Answer: b) The return on the investment made by shareholders, represented as a percentage
Context: ROE measures how effectively a company uses the capital invested by its shareholders to generate profits. It reflects the return shareholders are earning on their invested funds, making it a key indicator of financial performance.
How is the Gearing ratio calculated?
a) Gearing = (Debt + Equity) / Total assets
b) Gearing = Long-term liabilities / Capital employed
c) Gearing = Total assets / Shareholder equity
d) Gearing = Earnings before interest and tax / Interest payable
Answer: b) Gearing = Long-term liabilities / Capital employed
Context: The gearing ratio assesses the financial leverage of a company, showing the proportion of a company’s capital that is funded through long-term debt. High gearing means more debt reliance, which can increase risk during economic downturns.
What does the Quick (Acid Test) Ratio measure?
a) The ability of a company to convert inventory into cash
b) The ability of a company to pay off its current liabilities with assets that can be quickly turned into cash
c) The company’s ability to manage its overall liquidity
d) The company’s cash flow after taxes
Answer: b) The ability of a company to pay off its current liabilities with assets that can be quickly turned into cash
Context: The Quick Ratio excludes inventory from the calculation of assets, focusing only on the most liquid assets, such as cash and receivables, to assess a company’s ability to meet short-term obligations in case of financial trouble.
What does the Working Capital (Current) Ratio measure?
a) The company’s total liabilities
b) The company’s ability to cover short-term liabilities with short-term assets
c) The company’s long-term debt obligations
d) The company’s profitability from assets
Answer: b) The company’s ability to cover short-term liabilities with short-term assets
Context: The Working Capital Ratio evaluates whether a company has enough short-term assets to cover its short-term liabilities. A ratio between 1.5 and 2 is generally seen as ideal, indicating sufficient liquidity without excess idle assets.
What should investors consider when assessing the past performance of a share?
A) The share’s total return, including dividends
B) The market performance as a whole
C) The volatility of the share
D) All of the above
Answer: D) All of the above
Explanation: The past performance of a share should not be assessed in isolation. Investors should consider the performance of the broader market, the total return (capital gains plus dividends), and the share’s volatility to gain a comprehensive understanding of its performance.
Which of the following is NOT a reason why the past performance of a share should be considered with caution?
A) Past performance may not guarantee future results
B) The share’s future performance is entirely predictable based on past trends
C) The market conditions may change, influencing performance
D) The share’s volatility could alter the investment’s risk profile
Answer: B) The share’s future performance is entirely predictable based on past trends
Explanation: Although past performance provides useful insights, it does not guarantee future results. Market conditions and other external factors can influence future performance, making it impossible to predict with certainty.
Which of the following is an example of an active equity fund strategy?
A) Buy and hold
B) Indexation
C) Growth investing
D) Rebalancing
Answer: C) Growth investing
Explanation: Growth investing is an active strategy where investors focus on companies with high growth potential. In contrast, buy and hold and indexation are passive strategies, while rebalancing is a portfolio management technique that can be applied in both active and passive strategies.
What does a passive investor believe about the efficient market hypothesis (EMH)?
A) Markets are inefficient, and investors can consistently outperform the market.
B) The market quickly processes new information, and securities reflect their fair value.
C) Investors should focus on short-term price movements for maximum profit.
D) Investors should actively manage their portfolio to exceed market returns.
Answer: B) The market quickly processes new information, and securities reflect their fair value.
Explanation: Passive investors adhere to the efficient market hypothesis (EMH), which asserts that markets quickly incorporate all available information, making it impossible for investors to consistently outperform the market.
Which of the following is a characteristic of a growth investing strategy?
A) Focuses on companies with high dividend payouts
B) Seeks companies that command a competitive advantage and produce above-average earnings growth
C) Aims to buy stocks that are undervalued by the market
D) Concentrates on distressed companies with recovery potential
Answer: B) Seeks companies that command a competitive advantage and produce above-average earnings growth
Explanation: Growth investing focuses on companies that have the potential for high earnings growth. These companies are typically well-positioned to outperform industry peers, driven by a strong competitive advantage.
Which strategy involves investing in companies that are perceived to offer above-average earnings growth potential that has not yet been fully reflected in the share price?
A) Growth investing
B) Growth at a reasonable price (GARP)
C) Value investing
D) Income investing
Answer: B) Growth at a reasonable price (GARP)
Explanation: GARP is a less aggressive growth investment strategy where investors seek companies that offer good growth prospects at a reasonable price, meaning the share price has not yet fully reflected the potential for earnings growth.
What does the ‘Buy and hold’ passive strategy entail?
A) Actively buying and selling securities based on market trends
B) Holding a portfolio of securities indefinitely, with only minor adjustments
C) Focusing on short-term market fluctuations for quick profits
D) Buying securities from all sectors and adjusting regularly
Answer: B) Holding a portfolio of securities indefinitely, with only minor adjustments
Explanation: The buy and hold strategy is a passive investment approach where an investor purchases securities and holds them for the long term, making minimal adjustments to the portfolio.
What is the primary focus of value investing?
A) Investing in companies that show strong earnings growth potential
B) Investing in distressed companies that are expected to recover
C) Focusing on high-yielding dividend stocks
D) Buying high-growth stocks regardless of price
Answer: B) Investing in distressed companies that are expected to recover
Explanation: Value investing focuses on identifying undervalued stocks, typically in distressed conditions, with the expectation that their price will recover and revert to their intrinsic value.
Which of the following is an example of a passive equity fund strategy?
A) Quantitative investing
B) Bottom-up stock picking
C) Indexation
D) Growth investing
Answer: C) Indexation
Explanation: Indexation is a passive investment strategy where an investor replicates the performance of a market index, such as the S&P 500, without actively selecting individual securities.
Which of the following equity strategies focuses on buying stocks that are expected to increase in value and selling short stocks expected to fall?
A) Growth investing
B) Contrarian investing
C) Long/short
D) Absolute return investing
Answer: C) Long/short
Explanation: The long/short strategy, often used by hedge funds, involves buying stocks expected to rise in value (long positions) and selling stocks expected to decrease in value (short positions).
What is a key benefit of a global asset allocation in a diversified portfolio?
a) It eliminates all risk from the portfolio
b) It balances risk and reward while meeting investor objectives
c) It guarantees higher returns than domestic investments
d) It limits exposure to international markets
Answer: b) It balances risk and reward while meeting investor objectives
Explanation: A global asset allocation spreads investments across various stock markets worldwide, which helps balance the risk and reward for the investor. This strategy enables the portfolio to target markets that have potential for returns while considering the investor’s goals.
Which of the following is NOT typically a consideration when assessing equity diversification?
a) Geographic spread
b) Market sectors
c) Market capitalisation
d) Individual stock performance
Answer: d) Individual stock performance
Explanation: While geographic spread, market sectors, and market capitalisation are essential factors in equity diversification, focusing solely on the performance of individual stocks would not provide the necessary diversification to manage risk effectively.
What does market capitalisation (market cap) refer to?
a) The total dividends a company pays to shareholders
b) The total value of a company’s shares in circulation
c) The total amount of debt a company holds
d) The total revenue generated by a company
Answer: b) The total value of a company’s shares in circulation
Explanation: Market capitalisation refers to the total market value of a company’s outstanding shares of stock, calculated by multiplying the share price by the total number of shares in circulation.
Which of the following is a common method to assess a company’s future growth prospects?
a) Dividend cover
b) Price-to-earnings (P/E) ratio
c) Dividend payout ratio
d) Market capitalisation
Answer: b) Price-to-earnings (P/E) ratio
Explanation: The P/E ratio is a common method for analysing a company’s future growth prospects, as it compares the price of a company’s stock to its earnings per share.
What is an advantage of investing in small-cap equities?
a) They are guaranteed to provide higher returns than large-cap equities
b) They offer improved liquidity compared to large-cap stocks
c) They can offer significant upside growth potential
d) They are less volatile than mid-cap stocks
Answer: c) They can offer significant upside growth potential
Explanation: Small-cap equities tend to have higher growth potential due to their smaller size and greater ability to expand, though they also come with higher risk.
What is a disadvantage of investing in individual equities compared to equity funds?
a) They offer lower liquidity than equity funds
b) They are harder to trade than equity funds
c) They do not compound dividend payments
d) They provide less diversification than equity funds
Answer: d) They provide less diversification than equity funds
Explanation: Individual equities tend to provide less diversification because investors are exposed to the performance of specific companies, whereas equity funds can offer diversification across multiple stocks.
Which factor is NOT typically considered when determining the dividend prospects of a company?
a) Dividend cover
b) Historical rate of dividend growth
c) Market capitalisation
d) Dividend pay-out ratio
Answer: c) Market capitalisation
Explanation: Market capitalisation is not directly related to dividend prospects. Instead, dividend cover, growth rate, and payout ratio are better indicators of a company’s ability to maintain or grow dividends.
Which of the following is a disadvantage of foreign investing?
a) It provides a hedge against inflation
b) It involves additional risks such as political and economic uncertainty
c) It offers higher growth potential than domestic investing
d) It ensures greater returns due to currency fluctuations
Answer: b) It involves additional risks such as political and economic uncertainty
Explanation: Foreign investing introduces risks related to different political environments, economic conditions, and currency fluctuations, which can impact returns.
What is portfolio turnover?
a) The total number of securities in a portfolio
b) The rate at which securities are bought and sold in a portfolio
c) The rate of return on the portfolio
d) The frequency of dividend payments within a portfolio
Answer: b) The rate at which securities are bought and sold in a portfolio
Explanation: Portfolio turnover refers to the frequency with which assets in a portfolio are traded. High turnover may incur additional costs, potentially reducing overall returns.
What is a ‘Smart Beta ETF’?
a) A type of equity fund that uses active management
b) An ETF that tracks an index but uses alternative weighting schemes
c) A traditional ETF that only tracks the largest companies
d) A fund that is limited to stocks in the technology sector
Answer: b) An ETF that tracks an index but uses alternative weighting schemes
Explanation: Smart Beta ETFs are designed to generate returns above a benchmark by adjusting the weighting of index components based on factors like volatility, quality, or momentum.
What are the main reasons a company might seek to list its shares?
A) To increase its annual income
B) To raise capital for growth, enhance credibility, or provide an exit route for shareholders
C) To reduce shareholder control
D) To lower its tax burden
Answer: B) To raise capital for growth, enhance credibility, or provide an exit route for shareholders
Context: Companies often list shares to raise capital, increase their market visibility, or provide liquidity for existing shareholders. This process is crucial for funding further growth or for facilitating mergers and acquisitions.
What is the difference between a company being “listed” and being “admitted to trading”?
A) “Listed” means shares are quoted on a stock exchange, while “admitted to trading” allows shares to be traded on any platform
B) “Listed” means the shares meet the stock exchange’s criteria and are tradable, while “admitted to trading” allows trading without prior listing
C) There is no difference
D) “Listed” means the company is publicly owned, while “admitted to trading” refers to private companies
Answer: B) “Listed” means the shares meet the stock exchange’s criteria and are tradable, while “admitted to trading” allows trading without prior listing
Context: “Listing” means that shares meet the exchange’s minimum criteria. “Admission to trading” can happen independently of a listing procedure, and not all listed companies are admitted for trading immediately.
What is the role of stock exchanges in listing shares?
A) They set financial benchmarks for companies
B) They regulate the companies’ internal operations
C) They provide a marketplace for issuing and trading securities and ensure companies meet listing criteria
D) They act as a financial advisor to companies
Answer: C) They provide a marketplace for issuing and trading securities and ensure companies meet listing criteria
Context: Stock exchanges regulate the listing process by ensuring companies meet specific criteria related to market size, liquidity, and financial stability. They offer a marketplace for securities, facilitating trading for investors.
What does the term “quoted” refer to in the context of a company’s shares?
A) The company has been listed but not yet admitted to trading
B) The shares are available for trading and prices are publicly available
C) The company is offering shares at a fixed price
D) The company has been delisted
Answer: B) The shares are available for trading and prices are publicly available
Context: When shares are quoted, it means they are actively traded on the exchange, with publicly available pricing for investors. “Quoted” shares ensure there is market transparency.
What is the main reason behind the shift of many stock exchanges from mutual ownership to shareholder ownership?
A) To attract more domestic investors
B) To resist global market pressures
C) To become more dynamic, cost-efficient, and globalize trading networks
D) To limit market competition
Answer: C) To become more dynamic, cost-efficient, and globalize trading networks
Context: Stock exchanges have transitioned to shareholder ownership to adapt to global market demands, improve cost efficiency, and integrate with global financial systems, creating a more competitive and interconnected market.
What role does the Financial Conduct Authority (FCA) play in the UK’s listing process?
A) It sets the global stock exchange standards
B) It approves which companies are allowed to list on stock exchanges
C) It is responsible for setting listing criteria and regulating the market
D) It manages mergers and acquisitions for listed companies
Answer: C) It is responsible for setting listing criteria and regulating the market
Context: The FCA sets and enforces the standards and criteria for listing companies in the UK. It ensures that companies remain compliant with ongoing regulatory obligations to maintain market integrity.
What distinguishes the London Stock Exchange’s (LSE) Main Market from AIM (Alternative Investment Market)?
A) The Main Market has no listing requirements, while AIM has strict requirements
B) The Main Market is for small companies, while AIM is for large corporations
C) The Main Market has more stringent requirements for size, trading history, and capital, while AIM is for growing and smaller companies
D) There is no difference between the two markets
Answer: C) The Main Market has more stringent requirements for size, trading history, and capital, while AIM is for growing and smaller companies
Context: The LSE’s Main Market is aimed at more established companies that meet higher thresholds for size and trading history, while AIM caters to smaller, growing companies with fewer listing restrictions.
What is one of the motivations for stock exchanges to pursue mergers and alliances?
A) To reduce market access for multinational companies
B) To create more bureaucratic systems
C) To enhance liquidity and marketability of companies’ shares and build their brands globally
D) To decrease competition in the global financial marketplace
Answer: C) To enhance liquidity and marketability of companies’ shares and build their brands globally
Context: Mergers and alliances help stock exchanges create more dynamic, globally recognized markets. These partnerships enable firms to enhance liquidity, market access, and brand visibility, benefiting multinational companies.
Which of the following is the largest stock exchange in Germany?
A) Munich Stock Exchange
B) Frankfurt Stock Exchange
C) Berlin Stock Exchange
D) Stuttgart Stock Exchange
Answer: B) Frankfurt Stock Exchange
Explanation: The Frankfurt Stock Exchange is the largest in Germany, with a share turnover of around 90%, and lists most major German public companies.
What are the three segments of the Frankfurt Stock Exchange?
A) Public Market, Regulated Market, Open Market
B) Official Market, Regulated Market, Open Market
C) Primary Market, Regulated Market, Private Market
D) Major Market, Minor Market, Open Market
Answer: B) Official Market, Regulated Market, Open Market
Explanation: The Frankfurt Stock Exchange has three segments: Official Market (with strict criteria), Regulated Market (less strict criteria), and Open Market (with even lower requirements).
Which stock exchange in China lists most of the 2,200 stocks and trades primarily in renminbi?
A) Shenzhen Stock Exchange
B) Hong Kong Stock Exchange
C) Shanghai Stock Exchange
D) Beijing Stock Exchange
Answer: C) Shanghai Stock Exchange
Explanation: The Shanghai Stock Exchange (SSE) lists most of the 2,200 stocks and primarily trades in renminbi.
Which stock exchange in the US is the largest by market capitalization?
A) NASDAQ
B) NYSE
C) Chicago Stock Exchange
D) AMEX
Answer: B) NYSE
Explanation: The New York Stock Exchange (NYSE) is the largest in the world by market capitalization, with over 2,800 companies listed.
Which financial legislation introduced the concept of Multilateral Trading Facilities (MTFs) in Europe?
A) Dodd-Frank Act
B) Markets in Financial Instruments Directive (MiFID)
C) Basel III
D) European Market Infrastructure Regulation (EMIR)
Answer: B) Markets in Financial Instruments Directive (MiFID)
Explanation: MiFID, which became effective in 2007, introduced MTFs, organised trading facilities (OTFs), and systematic internalisers (SIs), making it easier for investors to trade away from traditional exchanges.
Which of the following is NOT a category of trading venue under MiFID II?
A) Multilateral Trading Facilities (MTFs)
B) Organised Trading Facilities (OTFs)
C) Systematic Internalisers (SIs)
D) Proprietary Trading Platforms (PTPs)
Answer: D) Proprietary Trading Platforms (PTPs)
Explanation: MiFID II does not mention Proprietary Trading Platforms (PTPs) as a recognized category. It includes MTFs, OTFs, and SIs.
Which of the following financial instruments can be traded through an Organised Trading Facility (OTF)?
A) Equities
B) Bonds
C) Commodities
D) Futures
Answer: B) Bonds
Explanation: Under MiFID II, OTFs are specifically designed for trading bonds, structured finance products, emission allowances, or derivatives, but not equities.
What is the primary purpose of introducing Systematic Internalisers (SIs)?
A) To regulate high-frequency trading
B) To allow firms to execute client orders on regulated exchanges
C) To facilitate off-market trading on a frequent and systematic basis
D) To improve liquidity in multilateral trading systems
Answer: C) To facilitate off-market trading on a frequent and systematic basis
Explanation: Systematic Internalisers (SIs) deal on their own account by executing client orders outside of regulated markets, MTFs, or OTFs in a frequent and systematic manner.
What is the primary function of Dark Pools in financial trading?
a) To allow small investors to trade in large quantities
b) To allow traders to buy or sell large orders without revealing them to the market
c) To provide transparency in stock prices before trades
d) To centralize all trading activities in one market
Answer: b) To allow traders to buy or sell large orders without revealing them to the market
Explanation: Dark pools allow traders to execute large orders without others detecting the transaction, which could potentially affect the stock price. Prices in dark pools are not visible before the trade, and the transaction prices are only revealed after the trade has been completed.
Which of the following is NOT typically a characteristic of Alternative Trading Platforms (ATPs) and OTC (Over-the-Counter) trading?
a) Facilitation of direct trades between parties without a centralized exchange
b) Increased transparency and pricing visibility
c) Used for trading equities, bonds, and derivatives
d) Operate outside of traditional exchanges like stock exchanges
Answer: b) Increased transparency and pricing visibility
Explanation: Alternative trading platforms and OTC markets are characterized by lower transparency compared to traditional exchanges. Prices are not always visible to the public in advance, and trades may be private between two parties (in the case of OTC).
In the context of Agency and Principal Dealing, which statement best describes an agent’s role when executing a trade for a client?
a) The agent takes ownership of the stock they buy
b) The agent charges a fee for facilitating the trade
c) The agent applies a mark-up to the price of the stock
d) The agent holds the stock in their inventory
Answer: b) The agent charges a fee for facilitating the trade
Explanation: An agent does not own the stock they buy; they facilitate the trade on behalf of the client. The agent charges a fee for the service of executing the trade but does not mark-up the price.
Which of the following best describes the Principal when executing a stock trade?
a) They charge a fee to the client for facilitating the trade
b) They do not take ownership of the stock being traded
c) They apply a mark-up to the price of the stock
d) They act solely as a mediator between two parties
Answer: c) They apply a mark-up to the price of the stock
Explanation: When acting as a principal, the trader buys and holds the stock in their own inventory. They apply a mark-up to the price to earn a profit, rather than charging a fee.
What is one of the key differences between Residential Property and Commercial Property investments?
a) Residential property typically offers higher returns than commercial property
b) Commercial properties usually require smaller investments compared to residential properties
c) Residential property investments are generally less affected by economic downturns
d) Commercial property often involves long-term contracts and larger investments
Answer: d) Commercial property often involves long-term contracts and larger investments
Explanation: Commercial properties typically involve larger investments and long-term contracts (over ten years), compared to residential properties, which usually have shorter, renewable leases.
What is the primary risk associated with direct property investment?
a) High liquidity
b) The risk of inflation impacting rental income
c) High transaction costs and illiquidity
d) Excessive volatility in short-term property prices
Answer: c) High transaction costs and illiquidity
Explanation: Direct property investments are illiquid because properties are immovable and indivisible. Additionally, the transaction costs (such as stamp duty and legal fees) are significant compared to other asset classes.
In terms of property valuation, what factors are typically considered by a valuer?
a) The property’s color and aesthetic appeal
b) The property’s size, age, condition, location, and market indicators
c) The property’s location only
d) Only the previous sale prices of the property
Answer: b) The property’s size, age, condition, location, and market indicators
Explanation: When valuing a property, surveyors take into account various factors, including the property’s size, age, condition, and location, as well as market indicators such as supply and demand and comparable property sales.
What is the main reason why property investments are considered attractive in a portfolio?
a) Their high volatility relative to other asset classes
b) Their ability to enhance diversification through low correlation with other asset classes
c) They offer quick liquidity for short-term gains
d) They have the highest returns compared to equities and bonds
Answer: b) Their ability to enhance diversification through low correlation with other asset classes
Explanation: Property investments are typically considered beneficial for portfolio diversification because they have low correlation with other asset classes like equities and bonds, thus reducing overall risk.
What is one of the key factors influencing returns on residential property investments?
a) The amount of land owned by the investor
b) Rental income and property price increases
c) The inflation rate of the country’s currency
d) The company managing the property
Answer: b) Rental income and property price increases
Explanation: In residential property investments, returns are mainly driven by rental income and potential increases in the property’s market value over time.
In the commercial property market, which of the following types of properties are included in the industrial sector?
a) Shopping centers and department stores
b) Office buildings and business parks
c) Distribution warehouses and logistics facilities
d) Residential housing and rental properties
Answer: c) Distribution warehouses and logistics facilities
Explanation: The industrial sector of commercial property includes distribution warehouses, logistics facilities, and other properties used for industrial purposes.
What is agricultural property?
A) Land used for residential purposes
B) Land or pasture used to grow crops and rear animals, including farm buildings
C) Property used for commercial office space
D) Property used for urban development
Answer: B) Land or pasture used to grow crops and rear animals, including farm buildings.
Agricultural property includes not only the land used for farming but also the buildings such as farm cottages, farmhouses, and other structures on the land.
What is a key reason why investors are turning to agricultural property?
A) It is the least risky asset class
B) It provides immediate returns
C) The scarcity and high price of residential and commercial property in cities make it less attractive for investment
D) It has the highest yield compared to other asset classes
Answer: C) The scarcity and high price of residential and commercial property in cities make it less attractive for investment.
As urban property prices become higher, investors look for alternatives like agricultural property for diversification.
Which of the following is a technology that has positively influenced the agricultural property market?
A) Drones and satellite imagery
B) Cryptocurrency
C) Blockchain
D) 3D printing
Answer: A) Drones and satellite imagery.
Technologies like drones and satellite imagery, along with improved genetics and data collection, have helped increase agricultural productivity, which has boosted profitability and land values.
What is one risk associated with agricultural property investment?
A) The ability to sell property at any time
B) A lack of formal public market for buying and selling
C) Property prices always increase
D) No changes in economic conditions
Answer: B) A lack of formal public market for buying and selling.
The agricultural property market is largely private, with no formal exchange, which can make it harder to buy or sell properties quickly.
What is the impact of break clauses in property leases?
A) They always benefit the tenant
B) They can allow either party to end the lease before the expiry date
C) They prevent rent reviews
D) They ensure the lease term is extended
Answer: B) They can allow either party to end the lease before the expiry date.
Break clauses provide flexibility to either the tenant or the landlord to terminate the lease early, which can affect the investment value of the property.
What does the term ‘gearing’ refer to in property investment?
A) The amount of profit made from property sale
B) Borrowing funds to purchase property, using the property as collateral
C) The amount of rent income received from tenants
D) The process of increasing the value of the property
Answer: B) Borrowing funds to purchase property, using the property as collateral.
Gearing involves borrowing money to fund the purchase of property, and it can significantly increase risks if property prices fall.
What are the advantages of commonhold over leasehold?
A) Commonhold loses its value over time, unlike leasehold
B) Commonhold properties are always rented, whereas leaseholds are sold
C) Commonhold doesn’t lose value over time and does not require a landlord
D) Leaseholds are simpler to manage than commonhold properties
Answer: C) Commonhold doesn’t lose value over time and does not require a landlord.
Commonhold properties do not depreciate like leasehold properties, as they are owned indefinitely, and the management is handled by the Commonhold Association, removing the need for a landlord
What is the general benefit of property rental income over time?
A) Property rentals can decline indefinitely
B) Rental income has traditionally provided returns higher than cash and gilts but slightly lower than equities
C) Rent income is usually fixed and cannot change
D) Rent is typically reviewed every 10 years
Answer: B) Rental income has traditionally provided returns higher than cash and gilts but slightly lower than equities.
Leases, especially those with upwards-only rent reviews, ensure that rental income remains stable or increases, providing steady returns over time.
What is a significant risk associated with property investment?
A) Always having tenants
B) Property prices can fall, especially in a rising interest rate environment
C) Rent prices always rise
D) High returns with minimal risk
Answer: B) Property prices can fall, especially in a rising interest rate environment.
While property prices generally rise over time, they can fall, especially when interest rates rise, making borrowing more expensive and reducing property values.
What is the effect of upward-only rent reviews in property leases?
A) Rent can only increase
B) Rent cannot be reviewed
C) Rent may decrease if market conditions are poor
D) Rent can be negotiated freely
Answer: A) Rent can only increase.
Upward-only rent reviews ensure that, at a minimum, rent will not decrease, and may even increase based on market conditions, benefiting property investors.
What tax relief is available on commercial property for qualifying plant and machinery?
A) Capital Gains Tax
B) Annual Investment Allowance (AIA)
C) Value Added Tax (VAT)
D) Inheritance Tax (IHT)
Answer: B) Annual Investment Allowance (AIA)
Explanation: The AIA offers 100% tax relief on qualifying plant and machinery purchases, allowing investors to offset the costs of these assets against their business income.
Which of the following is NOT eligible for Agricultural Property Relief (APR)?
A) Agricultural land
B) Growing crops
C) Farm buildings
D) Farm equipment
Answer: D) Farm equipment
Explanation: APR applies to agricultural land, growing crops, and farm buildings. It does not cover animals or equipment.
What is a potential risk of having poor-quality tenants in a rental property?
A) Increased rental income
B) Difficulty in paying taxes
C) Costs of eviction and maintenance
D) Lower property value
Answer: C) Costs of eviction and maintenance
Explanation: Poor-quality tenants may fail to pay rent or maintain the property, leading to costly eviction procedures and necessary repairs to restore the property.
What does the term “void periods” refer to in property investment?
A) When a property is under renovation
B) When a property is unlet and not generating income
C) When the rent is above market value
D) When property values are increasing
Answer: B) When a property is unlet and not generating income
Explanation: Void periods occur when a property is unlet, meaning no rental income is generated. These periods should be accounted for in income estimates.
What type of insurance covers lost rent and legal expenses during void periods?
A) Property insurance
B) Rent guarantee insurance
C) Life insurance
D) Fire insurance
Answer: B) Rent guarantee insurance
Explanation: Rent guarantee insurance, or tenant default insurance, covers lost rent and legal costs during void periods or when tenants fail to pay.
Which of the following factors can influence the capital return from agricultural property?
A) Crop prices
B) Foreign currency exchange rates
C) Seasonal weather patterns
D) Foreign investor tax laws
Answer: A) Crop prices
Explanation: Crop prices impact the value of agricultural land, as higher prices can lead to higher land valuations and robust returns when sold.
What can lead to depreciation in property value over time?
A) Rising demand
B) Property deterioration without repairs
C) Increased tenant interest
D) Economic growth
Answer: B) Property deterioration without repairs
Explanation: If a property deteriorates and no remedial action is taken, it may depreciate in value, with costs rising for necessary repairs.
What is one of the major transaction costs involved in property purchases in the UK?
A) Legal fees
B) Annual tax returns
C) Utility bills
D) Renovation costs
Answer: A) Legal fees
Explanation: Legal fees are a significant transaction cost when purchasing property, in addition to agent costs and possible stamp duty land tax (SDLT).
Which of the following taxes applies to property transactions in the UK?
A) Income tax
B) Stamp Duty Land Tax (SDLT)
C) Capital Gains Tax
D) Value Added Tax (VAT)
Answer: B) Stamp Duty Land Tax (SDLT)
Explanation: SDLT is levied on property transactions in England and Northern Ireland when the property value exceeds a certain threshold.
How is SDLT calculated for a property purchase above £250,000?
A) As a flat percentage of the total price
B) In multiple bands, based on price ranges
C) Only on the amount above £1 million
D) Based on the property’s location
Answer: B) In multiple bands, based on price ranges
Explanation: SDLT is calculated using bands, where the percentage tax rate applies to different portions of the purchase price.
What is the SDLT rate for the portion of a residential property purchase price between £250,001 and £925,000?
A) 2%
B) 5%
C) 10%
D) 12%
Answer: B) 5%
Explanation: The SDLT rate for the portion of a residential property purchase price between £250,001 and £925,000 is 5%.
What is the SDLT rate for non-residential property purchases up to £150,000?
A) 0%
B) 2%
C) 5%
D) 10%
Answer: A) 0%
Explanation: Non-residential property purchases up to £150,000 are exempt from SDLT, meaning the rate is 0%.
What is the additional SDLT rate for non-UK residents purchasing residential property in England and Northern Ireland?
A) 0%
B) 2%
C) 5%
D) 10%
Answer: B) 2%
Explanation: Non-UK residents face an additional 2% SDLT when purchasing residential property in England and Northern Ireland, as part of measures to control housing prices.
What services might a letting agent or property management company provide for landlords?
A) Paying the landlord’s taxes
B) Managing tenant applications
C) Collecting rent and managing property maintenance
D) Securing mortgages for tenants
Answer: C) Collecting rent and managing property maintenance
Explanation: Letting agents or property management companies often handle rent collection and property upkeep, ensuring the landlord’s property is well-maintained and tenants meet their obligations.
What is the typical fee charged by property managers for their services?
A) 2–5% of monthly rental income
B) 10–20% of monthly rental income
C) 25–30% of monthly rental income
D) A flat fee only
Answer: B) 10–20% of monthly rental income
Explanation: Property managers generally charge a percentage of the rental income, which varies between 10–20%, though flat fees are also an option.
Which of the following is not a typical cost incurred by landlords when maintaining a property?
A) Ongoing repairs and maintenance
B) Tenant’s personal insurance
C) Rates and council taxes
D) Legal requirements for commercial property standards
Answer: B) Tenant’s personal insurance
Explanation: While tenants may have personal insurance, it is not a cost borne by landlords. Landlords typically cover property maintenance, insurance, and other legal requirements.
What document is recommended to prevent disputes over repair obligations in agricultural property?
A) Rental Agreement Form
B) Insurance Certificate
C) Schedule of Condition
D) Landlord-Tenant Contract
Answer: C) Schedule of Condition
Explanation: A Schedule of Condition documents the property’s state at the beginning of the term, helping clarify repair obligations and avoid disputes.
At what point in the conveyancing process does the transaction become legally binding?
A) When the buyer applies for searches
B) At the exchange of contracts
C) When the seller prepares the contract
D) On the completion date
Answer: B) At the exchange of contracts
Explanation: The exchange of contracts marks the point of no return for both buyer and seller, making the transaction legally binding.
What is the reversionary value of a property?
A. The value of a property at the start of the lease
B. The expected value of the property at the end of the lease term
C. The cost of extending a lease on a property
D. The discounted value of lease improvements
Answer: B. The expected value of the property at the end of the lease term
Explanation: Reversionary value is the expected value of a property when the current lease term expires, often reflecting its potential market value at that time.
How does the length of a lease affect the property’s value?
A. A short lease is generally worth more than a long lease
B. A long lease generally has no impact on value
C. A long lease is generally worth more on the open market than a short lease
D. Lease length only affects properties with extensions
Answer: C. A long lease is generally worth more on the open market than a short lease
Explanation: As a lease nears expiration, the property’s value typically diminishes. Longer leases are more attractive to buyers and investors, increasing market value.
In enfranchisement cases, what determines the value improvement from lease extensions?
A. The number of leaseholders involved
B. The length of the unexpired term before the extension
C. The total cost of the extension
D. The property’s original market price
Answer: B. The length of the unexpired term before the extension
Explanation: The improvement in value depends on the remaining lease term before extension, with shorter terms typically benefiting more from extensions.
When calculating reversionary value, what must be disregarded?
A. The value of surrounding properties
B. Improvements made by the leaseholder that affect value
C. Property depreciation
D. Future market conditions
Answer: B. Improvements made by the leaseholder that affect value
Explanation: Any substantial improvements made by the leaseholder that increase the property’s value must be excluded to ensure a fair valuation.
Question 5: What is a key characteristic of property indices like the MSCI or AREF indices?
A. They are based on transaction prices
B. They are updated daily
C. They track property performance by valuations
D. They include only residential properties
Answer: C. They track property performance by valuations
Explanation: Property indices are based on valuations rather than actual transaction prices, making them less volatile but potentially less accurate in reflecting market conditions.
Why might property indices underestimate market volatility?
A. They rely on seasonally adjusted prices
B. They track direct property transactions
C. They are based on valuations, not transactions
D. They only focus on commercial properties
Answer: C. They are based on valuations, not transactions
Explanation: Since valuations tend to be smoother and slower to adjust than actual market transactions, indices underestimate the true volatility of the market.
What is a significant advantage of investing in property company shares?
A. Higher dividend yields than direct property investment
B. Less systemic risk than other asset classes
C. Greater liquidity compared to direct property investment
D. No impact from stock market fluctuations
Answer: C. Greater liquidity compared to direct property investment
Explanation: Shares in property companies can be traded on stock exchanges, providing better liquidity than direct property investments.
Why might property unit trusts and OEICs face liquidity issues?
A. They are required to maintain 50% cash reserves
B. They can only sell property assets at a discount
C. Encashment of units/shares may be postponed if many investors sell simultaneously
D. They are prohibited from holding commercial properties
Answer: C. Encashment of units/shares may be postponed if many investors sell simultaneously
Explanation: In cases where many investors want to redeem their shares at the same time, funds may need to postpone payouts to sell underlying property assets.
What are the tax implications for property unit trusts and OEICs in the UK?
A. They pay CGT on all gains within the fund
B. Investors are not subject to CGT on gains
C. They pay no CGT within the fund, but investors may pay CGT on gains when selling units
D. No corporation tax is paid on fund income
Answer: C. They pay no CGT within the fund, but investors may pay CGT on gains when selling units
Explanation: UK property unit trusts and OEICs do not pay capital gains tax within the fund, but investors are liable for CGT on gains made when units are sold.
What are REITs, and what benefits do they provide to investors?
A) Tax-transparent vehicles that invest directly in equities.
B) Tax-transparent property investment vehicles providing diversified exposure to rental properties.
C) Open-ended investment funds focusing on property development.
D) Life assurance policies linked to property NAV.
Answer: B – REITs (Real Estate Investment Trusts) are tax-transparent property investment vehicles.
They allow investors to gain diversified exposure to rental properties in a tax-efficient manner. They manage real estate portfolios and are traded on the stock exchange.
Which of the following conditions must a company meet to qualify as a REIT in the UK?
A) Must have dual residency status.
B) Must distribute at least 50% of profits to shareholders.
C) Must have at least 100 shareholders.
D) The value of a single property must exceed 50% of total investment value.
Answer: C – To qualify as a UK REIT, the company must have at least 100 shareholders.
Other conditions include holding at least 75% of total investments in real estate and distributing at least 90% of profits annually to shareholders.
What is the tax treatment for investors holding shares in REITs?
A) Investors are exempt from capital gains tax (CGT) on shares sold.
B) Investors pay tax on dividends and capital growth at their marginal tax rate.
C) Investors can reclaim tax deducted by the REIT.
D) REITs are subject to double taxation at both corporate and investor levels.
Answer: B – While REITs are exempt from CGT and corporation tax on property-related income and gains, investors are taxed on dividends and capital gains at their marginal tax rates.
Which rule was reformed in April 2023 as part of the Edinburgh Reforms regarding REIT taxation?
A) Requirement to hold at least three properties.
B) Requirement to distribute 100% of profits to shareholders.
C) Ban on holding a single commercial property worth £10 million or more.
D) Elimination of interest payment restrictions.
Answer: A – The Edinburgh Reforms removed the rule requiring a REIT to own at least three properties if a single commercial property is worth £20 million or more. This increased flexibility for REITs.
How does investing in a REIT differ from investing in directly held property?
A) REITs offer high leverage, while direct property investments are debt-free.
B) REITs are listed vehicles and offer liquidity, while direct property investments are illiquid.
C) Direct property investments provide tax benefits, whereas REITs do not.
D) REITs only invest in residential properties, while direct property investments allow diversification.
Answer: B – REITs are listed, closed-ended investment vehicles, providing liquidity and ease of trade on the stock exchange. Direct property investments, on the other hand, are generally illiquid and require significant outlay.
What is the gearing limit (ratio of interest paid on borrowings to rental income) for REITs?
A) 1:2
B) 1.25:1
C) 2:1
D) 0.75:1
Answer: B – The ratio of interest paid on borrowings to rental income for REITs must not exceed 1.25:1, ensuring controlled levels of gearing.
What type of dividends can REITs pay to investors?
A) Only Property Income Distributions (PIDs).
B) Normal dividends and Property Income Distributions (PIDs).
C) Only capital appreciation-based dividends.
D) Tax-free dividends exclusively.
Answer: B – REITs can pay dividends as Property Income Distributions (PIDs), normal dividends, or a combination of both. This provides flexibility in income distribution to investors.
What is one key advantage of investing in property?
a) Properties are highly liquid.
b) They offer potential for high cash flow and capital appreciation.
c) Maintenance of properties requires minimal effort.
d) Property values are guaranteed to rise.
Answer: b) They offer potential for high cash flow and capital appreciation.
Explanation: Investing in property can generate rental income (cash flow) and benefit from property value increases (capital appreciation). However, properties are illiquid (not easily sold), require significant maintenance, and values are not guaranteed to rise.
How can property investment provide a hedge against inflation?
a) Through properties located in poor areas.
b) By including ‘upward-only’ clauses in leases.
c) By selling properties quickly during inflationary periods.
d) By diversifying with stocks and bonds.
Answer: b) By including ‘upward-only’ clauses in leases.
Explanation: ‘Upward-only’ clauses ensure that rents increase over time, protecting income against inflation. Additionally, property values often appreciate with rising inflation, providing capital growth.
What is a key risk of investing in properties located in poor areas?
a) They are less prone to market fluctuations.
b) Tenants may pay rent more consistently.
c) Returns may take years to be realised, if at all.
d) They are highly liquid investments.
Answer: c) Returns may take years to be realised, if at all.
Explanation: Properties in poor areas may face challenges such as lower demand or higher risk (e.g., flooding), which can delay or diminish returns on investment.
Which of the following is NOT an example of how developers can reduce their environmental footprint?
a) Installing energy-efficient lighting and heating systems
b) Incorporating recyclable materials in construction
c) Building entirely new properties instead of refurbishing old ones
d) Installing onsite solar panels
Answer: c) Building entirely new properties instead of refurbishing old ones
Explanation: Refurbishing existing buildings with energy- and water-efficient appliances is more environmentally friendly compared to building entirely new properties, which involves significant energy use and emissions.
How has the COVID-19 pandemic influenced the retail property market?
a) High street shopping has increased due to social distancing measures.
b) There has been a rise in demand for warehouse space.
c) Most retail e-commerce platforms have shut down.
d) Demand for physical retail spaces has surged.
Answer: b) There has been a rise in demand for warehouse space.
Explanation: The pandemic accelerated the shift to online shopping, leading to increased demand for warehouses to store goods and manage logistics, while high street retail saw a decline.
Which of the following trends emerged due to the shift toward working from home during the pandemic?
a) Increased demand for city apartments
b) Focus on countryside relocation and homes with gardens
c) Decline in demand for larger homes
d) Surge in agricultural property prices
Answer: b) Focus on countryside relocation and homes with gardens
Explanation: As people spent more time at home during the pandemic, preferences shifted towards homes with features like gardens and countryside locations. However, this trend could reverse if companies end remote work policies.
Which of the following is NOT a common characteristic of alternative investments?
A) High correlation with traditional investments
B) Low liquidity compared with traditional investments
C) Less regulation and transparency
D) High costs and fees
Answer: A) High correlation with traditional investments
Explanation: Alternative investments have historically demonstrated a low correlation with traditional investments like equities and bonds, meaning they tend to perform independently of broad market trends.
Why are alternative investments generally considered difficult to value?
A) They are heavily regulated, making valuations complex
B) Their value is often subjective and dependent on trends and demand
C) They have standardized pricing mechanisms
D) They generate consistent income streams
Answer: B) Their value is often subjective and dependent on trends and demand
Explanation: Alternative investments, such as art and antiques, lack standardized pricing mechanisms and are often influenced by trends, fashions, and subjective assessments of worth.
Which of the following is a disadvantage of investing in physical alternative assets?
A) They can provide portfolio diversification
B) They often require secure and special storage
C) They typically have low transaction costs
D) They are highly regulated by financial authorities
Answer: B) They often require secure and special storage
Explanation: Many physical alternative investments, such as fine wine or precious metals, require specialized storage conditions to maintain their value, adding to the cost of ownership.
What is a major risk of investing in gold?
A) It is not widely accepted as a store of value
B) It does not fluctuate with market conditions
C) It does not generate dividends or regular income
D) It is immune to speculative market movements
Answer: C) It does not generate dividends or regular income
Explanation: Gold is often seen as a safe haven, but it does not produce any income, unlike stocks or bonds. Its value is primarily based on market demand and broader economic conditions.
Which of the following best describes the difference between hard and soft commodities?
A) Hard commodities are typically related to financial markets, while soft commodities are tied to physical goods
B) Hard commodities involve extraction or mining, whereas soft commodities are mainly derived from agriculture
C) Hard commodities are subject to greater price volatility than soft commodities
D) Hard commodities are generally renewable resources, while soft commodities are non-renewable
Answer: B) Hard commodities involve extraction or mining, whereas soft commodities are mainly derived from agriculture
Explanation: Hard commodities, such as metals and energy resources, require mining or drilling, often involving high capital costs. In contrast, soft commodities, like coffee and wheat, are agricultural products that are typically grown and harvested.
Which of the following is NOT a common way to acquire cryptocurrencies?
A) Buying them with fiat currency
B) Receiving them as payment for services
C) Mining them through cryptographic problem-solving
D) Earning them as a government-issued financial incentive
Answer: D) Earning them as a government-issued financial incentive
Explanation: Cryptocurrencies operate outside of traditional government systems and are generally not distributed by governments as incentives. They are typically acquired through purchases, earning through certain platforms, or mining.
What is a key reason why cryptocurrency investors must use a digital wallet?
A) It allows them to convert crypto into physical cash directly
B) It is the only way to access decentralised financial markets
C) It ensures secure storage and transfer of private cryptographic keys
D) It automatically tracks cryptocurrency price fluctuations
Answer: C) It ensures secure storage and transfer of private cryptographic keys
Explanation: Digital wallets store the private keys required to access and transfer cryptocurrency holdings securely. Without these keys, investors cannot access their funds.
What was one of the primary motivations for the creation of cryptocurrencies following the global financial crisis?
A) To create a digital currency backed by government reserves
B) To provide a decentralised alternative to traditional financial systems
C) To eliminate the need for taxation on digital transactions
D) To give central banks more control over the global economy
Answer: B) To provide a decentralised alternative to traditional financial systems
Explanation: Cryptocurrencies emerged as a response to dissatisfaction with banks and governments controlling money, offering individuals an independent financial system.
What is a major challenge of mining cryptocurrencies?
A) It requires government-issued permits in most countries
B) It consumes significant energy and computational resources
C) It is only possible for individuals with access to blockchain company servers
D) It results in automatic taxation of earned coins in all jurisdictions
Answer: B) It consumes significant energy and computational resources
Explanation: Mining requires solving complex mathematical problems, which demands extensive computational power and energy consumption, making scalability a challenge.
Why do some governments, such as China and Egypt, ban cryptocurrency use?
A) It is seen as a threat to their national fiat currencies and financial stability
B) Cryptocurrencies cannot be exchanged for goods or services
C) Governments cannot track transactions made with cryptocurrencies
D) The total supply of all cryptocurrencies is controlled by private banks
Answer: A) It is seen as a threat to their national fiat currencies and financial stability
Explanation: Some governments view cryptocurrency as a challenge to their monetary control and fear its potential for financial instability and illicit activity.
What is a significant regulatory concern regarding NFTs?
A) They are backed by central banks but lack liquidity
B) They provide full intellectual property rights to their buyers
C) Many NFT sellers do not actually own the intellectual property they are selling
D) NFTs are directly tied to the price of Bitcoin and Ethereum
Answer: C) Many NFT sellers do not actually own the intellectual property they are selling
Explanation: Ownership of an NFT does not always grant the buyer copyright or intellectual property rights, leading to legal uncertainties.
Why is it difficult to determine the value of an NFT?
A) NFT values are fixed based on Ethereum’s market price
B) The NFT market is governed by strict price control regulations
C) NFT values are influenced by subjective factors like scarcity and demand
D) NFTs have intrinsic monetary value backed by physical assets
Answer: C) NFT values are influenced by subjective factors like scarcity and demand
Explanation: Unlike fungible assets, NFT prices are determined by their uniqueness, market interest, and perceived artistic or cultural value.
What is one of the key factors to consider before purchasing an alternative investment?
a) The investor’s previous investment success
b) The value of the asset
c) The asset’s social media presence
d) The amount of time it takes to liquidate the asset
Answer: b) The value of the asset
Explanation: Before making a purchase, it’s vital to consider the value of the asset in question, as alternative investments like art, antiques, and classic cars can command high prices. Understanding the value helps ensure that the investment is sound.
What is meant by ‘fair value measurement’ (FVM) for Alternative Investment Funds (AIFs)?
a) Keeping assets at cost or a constant value over multiple accounting periods
b) Ensuring that assets always increase in value
c) Assigning a high value to securities in times of market volatility
d) Only assessing the value of liquid assets in the portfolio
Answer: a) Keeping assets at cost or a constant value over multiple accounting periods
Explanation: For AIFs, fair value measurement (FVM) ensures that assets are kept at cost or a constant value, even in periods of market volatility. This avoids overvaluation or undervaluation due to fluctuating market conditions.
When determining the value of private company shares, which of the following factors is not typically considered?
a) Asset value
b) P/E ratio
c) Cash flows
d) Company’s ability to hire top talent
Answer: d) Company’s ability to hire top talent
Explanation: Valuation methods for private company shares typically focus on asset value, P/E ratio, and cash flows. The company’s ability to hire top talent, while important for business operations, is not typically a factor in valuation.
What is the key challenge when using the Price-to-Earnings (P/E) method for valuing a private company?
a) The method is too simple for complex companies
b) The earnings multiple may not be easily applicable to an equivalent quoted company
c) Cash flows are not taken into account
d) The company’s current market value may be significantly lower than its calculated P/E
Answer: b) The earnings multiple may not be easily applicable to an equivalent quoted company
Explanation: One challenge of using the P/E method is that it can be difficult to find a similar quoted company to apply the earnings multiple. This makes the P/E ratio less straightforward when valuing private companies
What does a direct investment in alternative assets imply?
a) Investing in a fund that holds multiple alternative assets
b) Investing in the assets themselves
c) Delegating investment decisions to a third-party manager
d) Focusing only on government bonds
Answer: b) Investing in the assets themselves
Explanation: A direct investment in alternative assets means buying the asset itself, such as owning a piece of art or a classic car. This contrasts with indirect investment, where the investor purchases a fund that holds such assets.
Why has the traditional 60/40 equity-bond allocation been debated?
a) Because bond prices are no longer correlated with economic cycles
b) Because equities and bonds now tend to move more in unison, increasing risk
c) Because it has been too successful and needs to be revised
d) Because equities have become obsolete as an investment type
Answer: b) Because equities and bonds now tend to move more in unison, increasing risk
Explanation: The traditional 60/40 equity-bond allocation has been debated because, in recent times, equity and bond prices have tended to move in almost perfect correlation, which reduces the diversification benefit and increases overall portfolio risk.
How can investors access alternative assets in their portfolios?
a) Only through direct investment in the assets themselves
b) Only through indirect investment via funds
c) Through either direct or indirect investment, or a combination of both
d) Only by investing in a specific sector fund
Answer: c) Through either direct or indirect investment, or a combination of both
Explanation: Investors can access alternative assets through direct investment (purchasing the assets themselves) or indirect investment (via funds). A combination of both is often used to create a diversified portfolio.
