Chapter 1 - Cash Investments and Fixed-Interest Securities Flashcards
David invests in a fixed rate bank account when interest rates are high. At the end of the term, interest rates have fallen, and he is unable to secure a similar rate. Specifically, this type of risk is known as:
Select one:
a. liquidity risk.
b. market risk.
c. capital risk.
d. reinvestment risk.
d. reinvestment risk.
Sandra lives in the UK and is considering investing some of her cash deposits into an offshore account. She should be aware that:
Select one:
a. there is no additional risk of investing in offshore accounts since the Financial Services Compensation Scheme would protect her regardless of where she places her money.
b. most foreign countries have the same level of supervisory structure as the UK and institutional collapse may be less probable.
c. currencies regarded as strong may not rise enough to compensate for their lower interest rates.
d. high rates of interest can be achieved and they are usually offered by low inflation countries with potentially strengthening currencies.
c. currencies regarded as strong may not rise enough to compensate for their lower interest rates.
Which combination of inflation and interest rates is of the most benefit to savers in the final year of a cash savings plan?
Select one:
a. High inflation and low interest rates.
b. High inflation and high interest rates.
c. Low inflation and low interest rates.
d. Low inflation and high interest rates.
d. Low inflation and high interest rates.
John’s investment is no risk, sold at a discount to its par value and has a term of 3 months. What type of investment does he have?
Select one:
a. Deposit account.
b. Treasury bill.
c. Permanent interest bearing share.
d. Certificate of deposit.
b. Treasury bill.
If Sheila buys a gilt four days before the next interest payment date, usually she will:
Select one:
a. receive the impending interest payment and will pay a lower price than the clean price.
b. not receive the impending interest payment and will receive ‘cum dividend’.
c. receive the impending interest payment and will pay a higher price than the clean price.
d. not receive the impending interest payment and will pay a dirty price.
b. not receive the impending interest payment and will receive ‘cum dividend’.
Samir’s investment has just matured where the performance was linked to the value of an equity index. Samir’s investment was most likely to be a:
Select one:
a. NS&I guaranteed growth bond.
b. structured deposit.
c. zero coupon bond.
d. corporate bond.
b. structured deposit.
Barry has £50,000 deposited with ABC bank and £100,000 deposited with XYZ bank, both of which are based in London. What is the total amount he would receive under the FSCS in the event of default?
Select one:
a. £135,000.
b. £125,000.
c. £150,000.
d. £85,000.
a. £135,000.
Simon contributes £30 per month into a NS&I Direct ISA. This means that he is:
Select one:
a. unable to contribute to a stocks and shares ISA.
b. able to invest up to an additional £20,000 into a stocks and shares ISA.
c. able to invest up to an additional £19,640 into it in the current tax year.
d. unable to make any further subscription to his NS&I Direct ISA this tax year.
c. able to invest up to an additional £19,640 into it in the current tax year.
Anil buys a corporate bond and pays a clean price of £113.60 for a £100 nominal value of stock paying 7% coupon. Assuming it has exactly four years to run to maturity and had an original term of eight years, the gross redemption yield will be:
Select one:
a. 3.17%.
b. 2.76%.
c. 2.69%.
d. 3.88%.
a. 3.17%.
Yield = 7/113.60 = 6.16%
GRY = 6.16 - ((13.6/4)/113.40) * 100 = 3.17%
Suresh is considering the purchase of a UK Government gilt. The price of the gilt is published daily in the Financial Times but this will not reflect the actual price he could buy it at, because the price quoted is:
Select one:
a. ex-dividend.
b. the average price for the gilt on the previous day.
c. the price for selling gilts, not buying them.
d. the clean price.
d. the clean price.
George has £125,000 on deposit with a bank based in the Isle of Man, £150,000 with ABC Bank in the UK and £95,000 on deposit in Spain with a Spanish subsidiary of ABC Bank. Under the Financial Services Compensation Scheme, what would George receive if each of the three banks were to default?
You must select ALL the correct options to gain the mark:
a. £85,000 for the Isle of Man account.
b. £95,000 for the Spanish subsidiary of ABC Bank.
c. £85,000 for the Spanish subsidiary of ABC Bank.
d. £85,000 in total for the ABC Bank account and the Spanish subsidiary of ABC Bank.
e. £85,000 for the ABC Bank account.
c. £85,000 for the Spanish subsidiary of ABC Bank.
e. £85,000 for the ABC Bank account.
chapter reference 1B2A
Mavis has her savings in a building society instant access account. Which potential risks is she most likely to face?
You must select ALL the correct options to gain the mark:
a. Default risk.
b. Inflation risk.
c. Liquidity risk.
d. Event risk.
e. Interest rate risk.
a. Default risk.
b. Inflation risk.
e. Interest rate risk.
chapter reference 1B2
Tom is aged 16. His mother gives him £5,000 allowing him to invest in his first cash ISA. What is the maximum rate of interest which he can receive from the ISA in the full tax year to ensure no tax becomes payable?
Select one:
a. 2.25%.
b. 2%.
c. 1.25%.
d. 1%.
b. 2%.
chapter reference 1B3E
Mya is considering her first direct purchase of a corporate bond. When deciding which bond to purchase she should keep in mind that:
You must select ALL the correct options to gain the mark:
a. the redemption yield allows Mya to compare bonds on a common basis.
b. if the coupon is above current interest rates and the issuer has a strong credit rating, a bond will trade above par.
c. future interest rate falls will typically cause bond prices to rise.
d. where the interest yield is less than the redemption yield there will be a capital loss if she holds the bond until its redemption date.
e. future interest rate rises will typically cause bond prices to rise.
a. the redemption yield allows Mya to compare bonds on a common basis.
b. if the coupon is above current interest rates and the issuer has a strong credit rating, a bond will trade above par.
c. future interest rate falls will typically cause bond prices to rise.
chapter reference 1C4
If Jenny re-invests £7,500 in an NS&I Guaranteed Income Bond, she should be aware that:
Select one:
a. the money is tied up for at least three years.
b. interest is paid gross, either quarterly or monthly.
c. it pays a fixed rate of interest.
d. the minimum renewable amount she can re-invested is £1,000.
c. it pays a fixed rate of interest.
chapter reference 1B4E
Treasury bills differ to certificates of deposit due to the fact that:
Select one:
a. only certificates of deposit are bought at a discount to their par value.
b. they belong to different asset classes.
c. Treasury bills are backed by the Government.
d. only fund managers can purchase Treasury bills.
c. Treasury bills are backed by the Government.
chapter reference 1B5B
ZYX plc have decided to issue debentures. A potential investor should know that:
You must select ALL the correct options to gain the mark:
a. ZYX plc will pay a floating coupon on the debentures.
b. if ZYX plc secure the debentures on a floating charge, this will have a lower priority than a fixed charge in the event of the company being wound up.
c. ZYX plc can secure the debentures on a general charge over any of the company’s assets.
d. there will be no redemption date attached to the debentures.
e. ZYX plc can secure the debentures on the value of land owned by the company.
b. if ZYX plc secure the debentures on a floating charge, this will have a lower priority than a fixed charge in the event of the company being wound up.
c. ZYX plc can secure the debentures on a general charge over any of the company’s assets.
e. ZYX plc can secure the debentures on the value of land owned by the company.
chapter reference 1C8B
Gabby owns a conventional gilt while Cilla owns a corporate bond. The investments are different because:
You must select ALL the correct options to gain the mark:
a. only Gabby’s gilt will be exempt from capital gains tax.
b. the yield on Gabby’s gilt will generally be lower than Cilla’s corporate bond.
c. the spread between the buying and selling price is likely to be wider for Cilla’s corporate bond.
d. Gabby’s gilt will typically be more volatile than Cilla’s corporate bond.
e. Cilla’s corporate bond is generally deemed to have a higher risk than Gabby’s gilt.
b. the yield on Gabby’s gilt will generally be lower than Cilla’s corporate bond.
c. the spread between the buying and selling price is likely to be wider for Cilla’s corporate bond.
e. Cilla’s corporate bond is generally deemed to have a higher risk than Gabby’s gilt.
chapter reference 1C7/C8
A national supermarket chain is issuing corporate bonds, as is a much smaller chain of convenience stores. When compared, it is more likely that the supermarket will have the:
Select one:
a. lower credit rating and the yield of the convenience store chain will be higher.
b. higher credit rating and the yield of the convenience store chain will be lower.
c. lower credit rating and the yield of the convenience store chain will be lower.
d. higher credit rating and the yield of the convenience store chain will be higher.
d. higher credit rating and the yield of the convenience store chain will be higher.
chapter reference 1C5B
If a fund manager is only allowed to invest in investment grade bonds, he would be UNABLE to invest in a stock which is rated:
Select one:
a. Standard & Poor’s BB+.
b. Moody’s Baa 1.
c. Moody’s Baa 3.
d. Standard & Poor’s BBB+.
a. Standard & Poor’s BB+.
chapter reference 1C5B
A fund manager is considering making direct investments into fixed-interest securities and corporate bonds. What characteristics of each should he be aware of?
Select one:
a. Yields on gilts are generally higher than on corporate bonds.
b. The spread between the buying and selling prices of a corporate bond is narrower than for gilts.
c. Corporate bonds will always trade below par whereas gilts tend to trade above par.
d. Corporate bonds are typically more volatile than gilts.
c. Corporate bonds will always trade below par whereas gilts tend to trade above par.
chapter reference 1C8
Simon is considering purchasing an index-linked gilt. He should be aware that:
You must select ALL the correct options to gain the mark:
a. the coupon and yields tend to be much lower than those applicable to conventional stock.
b. the full amount of interest received will be taxable, excluding any inflation uplift.
c. prospective redemption yields are currently quoted in the financial press assuming a 3% inflation rate.
d. both the interest payments and the capital repayment at redemption are adjusted in line with the changes in the Retail Prices Index.
e. if the Retail Prices Index falls the interest and capital payments will remain level.
f. a gilt issued during or after September 2005 increases payments by the Retail Prices Index figure applicable four months prior to each payment date.
a. the coupon and yields tend to be much lower than those applicable to conventional stock.
d. both the interest payments and the capital repayment at redemption are adjusted in line with the changes in the Retail Prices Index.
c. prospective redemption yields are currently quoted in the financial press assuming a 3% inflation rate.
chapter reference 1C7B
ABC plc has raised finance by not going to a traditional lender. The security they have offered for the loan could be sold at any time, which means that ABC plc must have issued:
Select one:
a. permanent interest bearing shares.
b. commercial paper bills with security.
c. a fixed charge debenture.
d. a floating charge debenture.
d. a floating charge debenture.
chapter reference 1C8B
Gerald purchases a gilt 5 days before its interest payment date. He will:
Select one:
a. receive the next interest payment and will pay a price higher than the clean price.
b. not receive the next interest payment and will pay a price lower than the dirty price.
c. not receive the next interest payment and will pay a price lower than the clean price.
d. receive the next interest payment and will pay a price lower than the dirty price.
c. not receive the next interest payment and will pay a price lower than the clean price.
chapter reference 1C2C
Vincent is considering making an investment in index-linked gilts. He should be aware that the index-linking applies to:
Select one:
a. capital repayment at redemption only.
b. alternate interest payments and capital repayment at redemption.
c. interest payments only.
d. all interest payments and capital repayment at redemption.
d. all interest payments and capital repayment at redemption.
chapter reference 1C7B
Conditions that allow investors to buy bond income at almost any redemption period for much the same price would be reflected by a:
Select one:
a. flat yield curve.
b. stable yield curve.
c. normal yield curve.
d. reverse yield curve.
a. flat yield curve.
chapter reference 1C6
Edith, 42, is looking for a savings account offered by National Savings & Investments. Her choice includes:
You must select ALL the correct options to gain the mark:
a. a direct saver account.
b. an investment guaranteed growth bond.
c. index-linked savings certificates.
d. an easy access savings account.
e. an investment account.
a. a direct saver account.
e. an investment account.
chapter reference 1B4
Vinesh is considering buying a corporate bond on the secondary market. The title of each bond will always provide him with information about the:
You must select ALL the correct options to gain the mark:
a. issue date.
b. coupon.
c. name of the first owner.
d. issuer’s name.
e. maturity date.
b. coupon.
d. issuer’s name.
e. maturity date.
chapter reference 1C1A
Spencer paid £7,500 for £10,000 nominal value of Treasury 4% 2029. How much interest will he receive from this stock every six months?
Select one:
a. £150.
b. £300.
c. £400.
d. £200.
d. £200.
chapter reference 1C1A
When compared with gilts, corporate bonds will typically:
You must select ALL the correct options to gain the mark:
a. be less volatile.
b. have a lower spread.
c. be less liquid in a market crisis.
d. have a higher risk.
e. have a higher yield.
c. be less liquid in a market crisis.
d. have a higher risk.
e. have a higher yield.
chapter reference 1C8
