Chapter 5

Question 1

[1017609] In which of the following ways are commercial property returns are typically measured?
ARental yields BNet profits CGross profits DReturn on equity

Answer 1

The correct answer is: A - Rental yields
Explanation
Commercial property valuations are generally based on the net present value of rental yields.

Question 2

[1049214] Kate is the holder of a put option on stock ABC. The option has a strike of 120 and a premium of 25. At what price of the underlying is Kate’s breakeven?
A25 B95 C120 D145

Answer 2

The correct answer is: B - 95
Explanation
Kate has paid a premium of £25 so the underlying needs to fall to 95 from 120 for her to make back her premium and breakeven.

Question 3

[1057000] What is the maximum tax efficient annual investment that can be made in new shares of a Seed Enterprise Investment Scheme (SEIS), and what is the maximum income tax relief that can be obtained in any one fiscal year?
A£500,000 max investment £150,000 max income tax relief B£200,000 max investment £60,000 max income tax relief C£100,000 max investment £30,000 max income tax relief D£100,000 max investment £50,000 max income tax relief

Answer 3

The correct answer is: D - £100,000 max investment £50,000 max income tax relief
Explanation
April 6 2012, saw the launch of the EIS and the VCTs little cousin, the Seed Enterprise Investment Scheme (SEIS). It complemented the EIS scheme and was predominantly designed to stimulate entrepreneurship and to help small, early-stage companies to raise equity finance.
The measure supported the coalition government’s growth agenda by helping smaller, riskier, early-stage UK companies, which may face barriers in raising external finance, to attract investment, making it easier for these companies to become established and grow.
It applies to smaller companies, under two years old, with 25 or fewer employees and assets of up to £200,000, which are carrying on or preparing to carry on a new business. It enables individual investors with opportunities to get a range of tax reliefs by investing in new shares of companies in the SEIS. The scheme makes available tax relief to investors who subscribe for shares and have a stake of less than 30% in the company.
The relief will apply to investments made on or after 6 April 2012. SEIS investors can put in up to £100,000 in a single tax year and this investment can be spread over a number of SEIS-eligible companies.Investors can get up to 50% tax relief in the tax year the investment is made, regardless of their marginal tax rate.

Question 4

[1070291] Which of the following is true of ETFs?
AETFs often trade at a premium to their NAV BETFs often trade at a discount to their NAV CETFs often trade close to their NAV DETFs often trade at either a premium or a discount to their NAV

Answer 4

The correct answer is: C - ETFs often trade close to their NAV
Explanation
ETFs usually trade close to their NAV, due to arbitrage trading that exploits the price difference between the ETF share and the underlying asset.

Question 5

[1017575] Which of the following is a feature of a covered warrant?
AHolding a put and a call warrant BHolding cash to cover exposure CHolding other securities to cover exposure DHolding the underlying asset to cover exposure

Answer 5

The correct answer is: D - Holding the underlying asset to cover exposure
Explanation
Covered warrants are rights to buy or sell shares. However, the issuer of these covered warrants, typically investment banks, must cover the position they create by writing a warrant through holding a position in the underlying asset.

Question 6

[1017610] Regular bonuses paid with profits policies issued by Life Companies are called:
ATerminal bonuses BReversionary bonuses CSpecial bonuses DAnnual bonuses

Answer 6

The correct answer is: B - Reversionary bonuses
Explanation
Life company bonds that are issued ‘with profits’ have a basic sum assured plus a share in any investment profits made by the company. These profits can be shared through reversionary bonuses - which are added each year and once paid cannot be taken away - and terminal bonuses - which are awarded on maturity of the policy or the death of the policy holder.

Question 7

[1017595] A long-short position is most likely to be used by what kind of investment vehicle?
AVenture capital trust BREIT CInvestment trust DHedge fund

Answer 7

The correct answer is: D - Hedge fund
Explanation
Hedge funds (or unregulated schemes) typically take both long and short positions in the markets.

Question 8

[1017576] Which of the following is not an advantage to the investor in a Collective Investment Scheme?
AAn ability to invest in a diversified product BSpecialist investment expertise to implement the investment strategy of the fund CControl over the investment strategy of the fund DReduction in the administrative burden of investing in securities

Answer 8

The correct answer is: C - Control over the investment strategy of the fund
Explanation
A collective investment scheme is run by the manager of that scheme, who in turn is overseen by the trustee. The investor has no control over the objectives or implementation of the investment strategy.

Question 9

[1049215] Which of the following would increase the value of a call option?
AA rise in interest rates and an increase in the exercise price BA fall in interest rate and an increase in the exercise price CA rise in interest rates and a decrease in the exercise price DA fall in interest rates and a decrease in the exercise price

Answer 9

The correct answer is: C - A rise in interest rates and a decrease in the exercise price
Explanation
A call option value will increase with a rise in interest rates and a decrease in the exercise price.

Question 10

[1017660] What percentage of a single premium life assurance bond can be taken from the original capital as income per annum on a tax deferred basis?
A2% B5% C10% D15%

Answer 10

The correct answer is: B - 5%
Explanation
The 5% per annum can, however, be carried forward to future years if unused.

Question 11

[1032965] An investor has an ISA account. She then chooses to go and live abroad. Which of the following describes what would happen to the ISA account?
AThe ISA account must be closed before she leaves the country BShe can keep the account open, receive the tax benefits and continue to contribute to it CShe can keep the account open, receive the tax benefits but no longer contribute to it DShe can keep the account open but will no longer receive the tax benefits

Answer 11

The correct answer is: C - She can keep the account open, receive the tax benefits but no longer contribute to it
Explanation
If you open an ISA and then move abroad, you are no longer classed as a UK resident, so you cannot put money into the ISA.
You can still keep your ISA open and you will still be entitled to the tax benefits on investments held in the ISA. If you become UK resident and ordinarily resident, you can start putting money in again.

Question 12

[1040940] With regard to Venture Capital funds, financial bootstrapping refers to:
APrivate equity capital provided to small growing companies BLeveraged purchases of companies CMinority purchase of a business via co investment DA collection of methods used to minimise external equity and debt financing

Answer 12

The correct answer is: D - A collection of methods used to minimise external equity and debt financing
Explanation
This method will allow the founders the freedom to develop the company as they see best. The other methods refer to venture capital, leveraged buy-outs, and equity co investments.

Question 13

[1070007] Following the Retail Distribution Review (RDR), which of the following correctly explain the resurgence in interest in investment trust companies?
IThe elimination of provider commission for open-ended funds
IIThe greater level of FCA regulation for open-ended funds
IIIThe greater level of PRA regulation for closed-ended funds
IVCompared to open-ended funds, closed-ended funds are less likely to become too large for effective management
AI and II only BIII and IV only CII and III only DI and IV only

Answer 13

The correct answer is: D - I and IV only
Explanation
Investment trust companies are regulated by the UKLA, HMRC, and Companies Act 2006, not the PRA.

Question 14

[1040930] Instant access accounts usually pay interest at a rate that is:
AVariable BFixed CIndexed for inflation DNon-existent

Answer 14

The correct answer is: A - Variable
Explanation
For the benefit of having instant access to your money, the provider will not commit to paying a fixed rate of interest.

Question 15

[1070293] Nathan Rooney has a salary of £80,000 pa. What will be the highest rate of tax relief he receives on a personal pension contribution?
A45% B40% C33% D20%

Answer 15

The correct answer is: B - 40%
Explanation
The investor will receive income tax relief on his pension contributions up to an equivalent of 100% of earnings (salary and other earned income) each year at their highest marginal income tax rate, subject to an annual allowance above which tax will be charged at the individual’s marginal rate, whether made by them and/or their employer. The annual allowance for the current tax year is £40,000. If an investor exceeds the annual allowance, they will need to declare the extra pension savings and pay an annual allowance charge through his income tax self-assessment.

Question 16

[1017611] What is the most accurate definition of a future?
AA right via an agreement to buy or sell a given quantity of a particular asset at a set future date and at a pre-agreed price BA binding agreement to buy or sell a variable quantity of a particular asset at a set future date and at a pre-agreed price CA right via an agreement to buy or sell a variable quantity of a particular asset at a set future date and at a pre-agreed price DA binding agreement to buy or sell a given quantity of a particular asset at a set future date and at a pre-agreed price

Answer 16

The correct answer is: D - A binding agreement to buy or sell a given quantity of a particular asset at a set future date and at a pre-agreed price
Explanation
Futures are binding agreements or a contract. By definition, a future is traded on exchange and subject to significant contract specifications.

Question 17

Question 17
[1017577] Which of the following is not classed as a Collective Investment Scheme?
AOpen-ended investment company BLife company fund CInvestment company with variable capital DUnit trust

Answer 17

The correct answer is: B - Life company fund
Explanation
A collective investment scheme is a mutual fund, where all investors pool their resources to create a portfolio of assets, typically managed by a fund manager, in order to gain a mutual benefit for the investors. A life company fund is more specifically focused on the life assured.

Question 18

[1017591] Venture capital trusts (VCT) are most similar in structure to which other collective investment vehicle?
AOpen-ended investment company BInvestment trust company CUnit trust DEnterprise investment scheme

Answer 18

The correct answer is: B - Investment trust company
Explanation
Venture capital trusts are constituted very much like an investment trust. However, their investment focus is specifically on smaller, higher-risk companies. Although the target investments are similar to an EIS, the structure is very different.

Question 19

[1017569] Ring of Gold plc design and make quality wedding rings. They regularly need to purchase quantities of gold and are concerned about its rising price. Which is the following is/are correct in relation to using a gold future/forward contract?
IRing of Gold should take a long position in gold futures
IIFutures in general are less standardised than forwards
AI only BII only CBoth DNeither

Answer 19

The correct answer is: A - I only
Explanation
Long futures position benefit from price rises. Any profit from the long future can be used to compensate Ring of Gold for the incresing price of gold.
Futures are standardised by the exchanges that they trade on. Forwards trade over the counter and can be tailored to the needs of the investor.

Question 20

[1010953] Which of the following is NOT the responsibility of the unit trust manager?
ACreation of new units upon demand BBuying/Selling units from/to investors CInvestment decisions DUnit pricing

Answer 20

The correct answer is: A - Creation of new units upon demand
Explanation
Creation of new units is the responsibility of the trustee, at the request of the manager.

Question 21

[1056995] You are holding a meeting with your client, during which you are explaining to her the benefits of diversifying into different asset types and classes. With regard to diversification benefits, which of the following statements is least likely to be true?
AIf the investments are company shares, there is little benefit in diversifying between British and international equity markets BAs property has gained in popularity, it has become recognised as a core asset class in its own right CAssets with a low or negative correlation tend to be attractive to investors since when one asset is performing badly, the other asset is rising in value DThere is a predictably strong positive correlation between investor returns from equities, and investor returns from government bonds

Answer 21

The correct answer is: D - There is a predictably strong positive correlation between investor returns from equities, and investor returns from government bonds
Explanation
Globalisation has reduced diversification benefits from holding a mixture of both UK and international shares in a portfolio, since returns from different equity markets tend to be strongly positively correlated to one another. By contrast, returns from shares and government bonds tend to move in opposite directions in times of equity market stress, there is often a ‘flight to quality’ effect as investors sell shares and move into bonds instead.

Question 22

[1017608] What may be the rationale for a hedge fund strategy to take a long/short position?
ALower transaction costs BTo follow a passive investment strategy CTo create a market-neutral position DTo benefit from falls in the market

Answer 22

The correct answer is: C - To create a market-neutral position
Explanation
Long/short funds do not look at the market as a whole, hoping for market rises or falls. Instead, they are more likely to look for under-priced/over-priced stocks and to buy or short sell these accordingly with the intention that, irrespective of the market movements, they will make a profit.

Question 23

[1017585] Which of the following is/are correct provisions of UCITS III?
I100% of a UCITS Fund can be invested in other UCITS funds
IIUp to 10% of the NAV of the fund can be invested in one issuer
IIIThe use of derivatives is limited to 10% of the NAV of the fund
AI and II BII and III CI and III DI, II, and III

Answer 23

The correct answer is: A - I and II
Explanation
There is a restriction on how much exposure a UCITS fund can have to derivatives, but this is 20%.

Question 24

[1017596] Which of the following is most vulnerable to theft of assets?
AVenture Capital Trust BHedge Fund CREIT DInvestment Trust

Answer 24

The correct answer is: B - Hedge Fund
Explanation
It is possible for a hedge fund not to appoint a custodian to hold and protect the assets. This could lead to a greater possiblity of theft of the assets.

Question 25

[1017574] Which of the following is/are correct in relation to contracts for difference (CFD)?
ICFDs are not subject to capital gains tax
IICFDs are not subject to stamp duty
AI only BII only CBoth DNeither

Answer 25

The correct answer is: B - II only
Explanation
CFDs are cash settled so do not incur stamp duty, but they are subject to CGT.

Question 26

[1070286] What is the maximum subscription per subscription year into a child trust fund or Junior ISA?
A£3,600 B£4,368 C£9,000 D£20,000

Answer 26

The correct answer is: C - £9,000
Explanation
Contributions of up to £9,000 pa can be made to a child’s CTF or Junior ISA. The ‘subscription year’ for a CTF runs from the child’s birthday to the next. For Junior ISAs it is based on the fiscal year.

Question 27

[1049216] When volatility rises what happens to the value of a call and a put option?
ACall value rises and the put value falls BPut value rises and the call value falls CBoth the call and the put values rise DBoth the call and the put values fall

Answer 27

The correct answer is: C - Both the call and the put values rise
Explanation
An increase in volatility will increase the value of both a call and a put because there is an increased chance of the options becoming in the money.

Question 28

[1040942] An investor discusses their interest in structured products. She feels willing to take some risk with the capital, but would like to mitigate the downside risk as she has no market experience. She would also like to avoid expensive trading strategies. Which of the following products are most suitable?
APrincipal protected BBuffer zone investments CReturn enhanced investments DStrategic access investments

Answer 28

The correct answer is: B - Buffer zone investments
Explanation
Buffer zone investments mitigate the downside risk, offer better returns than principal protected, are less expensive than strategic access, and have no market speculation unlike return enhanced investments.

Question 29

[1040938] Which of the following represent advantages of investing in bonds via bond funds rather than bonds directly?
IInvestment control
IIInflation hedge
IIIDiversification
IVCompound interest
AI only BI & II only CI & III only DIII & IV only

Answer 29

The correct answer is: D - III & IV only
Explanation
These are the main advantages of bond funds over direct investment.

Question 30

[1040168] The structure of a building society is usually one of a:
APublic limited company BPrivate limited company CMutual organisation DTrust

Answer 30

The correct answer is: C - Mutual organisation
Explanation
A mutual organisation is one that is owned by its members. In the case of a building society that would be its depositors and its borrowers.

Question 31

[1017240] EIS Schemes are intended to encourage investment in which type of company?
ALarge low risk companies BSmall low risk companies CLarge high risk companies DSmall high risk companies

Answer 31

The correct answer is: D - Small high risk companies
Explanation
Small and high risk companies.

Question 32

[1017571] Which of the following statements is incorrect in relation to options?
ACall options rise in value when the underlying rises BPut options fall in value when the underlying rises CThe option holder has less risk than the option writer DOption holders need to deposit margin with their broker

Answer 32

The correct answer is: D - Option holders need to deposit margin with their broker
Explanation
The option holder will pay the premium on the option, and this represents his maximum loss, so there is no need to post margin. The option writer is exposed to further losses, so will need to post margin to his broker in order to cover the broker’s exposure to credit risk.

Question 33

[1017061] In relation to OEICs, which of the following is incorrect?
IInvestors buy shares in the OEIC
IIOEICs usually have a dual price system
AI only BII only CBoth DNeither

Answer 33

The correct answer is: B - II only
Explanation
OEICs are usually single priced and investors do buy shares in the OEIC.

Question 34

[1017613] James Bond invests £10,000 in an investment trust buying zeros. What returns should he potentially expect?
AA high level of Income BA lower level of income CIncome and capital gains DCapital gains only

Answer 34

The correct answer is: D - Capital gains only
Explanation
‘Zeros’ refers to zero dividend. These shares provide no income at all. Instead holders are typically guaranteed a certain capital return on the wind-up of the company (assuming there is money left after all creditors have been paid).

Question 35

[1017602] Life Funds suffer tax on capital gains at what rate?
ANil in the fund - only on disposal by the investor B10% C20% D22%

Answer 35

[1017602] Life Funds suffer tax on capital gains at what rate?
ANil in the fund - only on disposal by the investor B10% C20% D22%

Question 36

[1017573] A put option on XYZ plc is bought for a £1 premium. The strike price is £2 and currently XYZ is trading at £2.50. Which of the following is correct?
IThe option is out of the money
IIThe time value is £1, the intrinsic value is zero
AI only BII only CBoth DNeither

Answer 36

The correct answer is: C - Both
Explanation
Intrinsic value = amount in the money i.e. nil
Time value = Premium - Intrinsic Value i.e. £1 - 0 = £1.

Question 37

[1017681] In order to be exempt from certain requirements imposed by the Pensions Act 2004, a small self-administered scheme must have no more than which of the following number of members?
A10 B11 C15 D20

Answer 37

The correct answer is: B - 11
Explanation
An SSAS is a company scheme where the members are usually all company directors or key staff.
Where schemes have fewer than 12 members, and where all decisions are made unanimously or have an independent trustee, are exempt from the trustees’ knowledge and understanding requirements of the Pensions Act 2004 and the member-nominated trustee requirements.

Question 38

[1017590] Who supervises an OEIC’s management?
ATrustees BDirector CDepository DFund Managers

Answer 38

The correct answer is: C - Depository
Explanation
The depository not only becomes the legal owner of the assets (the custodian) held by the fund but is also responsible for overseeing the management of the fund. They perform much the same role as a trustee for a unit trust.

Question 39

[1056993] Which of the following statements is the BEST description of the way in which diversification and risk reduction are related?
ADiversification and risk reduction is achieved by combining assets whose returns are not perfectly negatively correlated with one another BDiversification and risk reduction is achieved by combining assets whose returns are not perfectly positively correlated with one another CDiversification and risk reduction is achieved by combining assets whose returns are not correlated at all with one another DDiversification and risk reduction are not related to the idea of correlation between assets

Answer 39

The correct answer is: B - Diversification and risk reduction is achieved by combining assets whose returns are not perfectly positively correlated with one another
Explanation
Diversification and risk reduction is achieved by combining assets, whose returns have not moved in perfect step, or are not perfectly positively correlated with one another.

Question 40

[1017588] Which of the following would not hold land or buildings as investments directly?
AUnit Trust BLife Fund CUCITS Fund DInvestment Trust Company

Answer 40

The correct answer is: C - UCITS Fund
Explanation
Although non-UCITS retail schemes (NURS) are permitted to invest directly in immovable property, UCITS funds are not.

Question 41

[1040931] A 90 day notice account would require the holder to:
AWait 90 days from depositing funds before a withdrawal could be made BWithdraw funds for 90 days at a time CGive notice to withdraw funds 90 days before they do, with no waiver from the provider DGive notice to withdraw funds 90 days before they do, with a waiver possibility

Answer 41

The correct answer is: D - Give notice to withdraw funds 90 days before they do, with a waiver possibility
Explanation
The provider could allow the notice period to be waived, but penalties may be applied.

Question 42

[1047095] What is the best description of a Venture Capital Trust (VCT)?
AA quoted company investing in a portfolio of quoted companies BAn unquoted company investing in a portfolio of property CA quoted company investing in a portfolio of unquoted companies DAn unquoted company investing in a portfolio of distressed securities

Answer 42

The correct answer is: C - A quoted company investing in a portfolio of unquoted companies
Explanation
A VCT is a listed and quoted company on the LSE. VCT shares can be bought and sold via a broker in the same manner as any other share.
A VCT will maintain a portfolio of unquoted companies, looking to provide the necessary capital to allow those companies to grow and become listed and profitable.

Question 43

[1017594] Which of the following investments can trade at a premium or at a discount?
IUnit Trust
IIVenture Capital Trust
IIIInvestment Trust
AI and II only BII and III CIII only DII only

Answer 43

The correct answer is: B - II and III
Explanation
Investment trust companies and venture capital trusts are similar in that they trade on the LSE. This means that there is no direct link between the pricing of the share and the net asset value of the fund. Instead the share’s value will be determined by supply and demand, which could lead to them trading at a premium or discount.

Question 44

[1035740] A higher rate taxpayer gains £60,000 on share in a VCT. What is the tax payable?
A0% B18% C20% D40%

Answer 44

The correct answer is: A - 0%
Explanation
VCT’s incur no CGT.

Question 45

[1070292] Which of the following is true of physical ETFs and leverage?
AETFs usually have significant levergage BETFs usually have moderate leverage CETFs usually have a small degree of leverage DETFs usually have no leverage

Answer 45

The correct answer is: D - ETFs usually have no leverage
Explanation
ETFs usually have no leverage.

Question 46

[1017584] Which of the following investments typically has the highest level of gearing?
AUnit Trusts BLife Company Funds COEICs DInvestment Trusts

Answer 46

The correct answer is: D - Investment Trusts
Explanation
Unit trust and OIECs are restricted in their investment in derivatives and cannot borrow to gear up the fund. Life company funds are liability matching funds and are unlikely to be heavily geared. An investment trust is a company, and like any other company can borrow to gear up the business. There are no definitive guidelines on the amount of gearing an investment trust can engage in.

Question 47

[1049213] Jim is the holder of a put option on XYZ stock that expires in three months time. The option has a strike of 80p and a premium of 10p. Assuming a current share price of 90p which of the following is true?
AJim’s option is in the money BJim’s option is at breakeven CJim’s option has time value DJim runs the risk of the price falling

Answer 47

The correct answer is: C - Jim’s option has time value
Explanation
Jim’s option is currently out of the money so his option has no intrinsic value but as it still has 3 months to maturity it does have time value.

Question 48

[1040932] Which of the following are disadvantages of money market accounts versus a regular savings account?
ILiquidity
IIMinimum deposits
IIIWithdrawal limits
IVLower interest rates
AI and II BI,II, and III CI and IV DI,II,III and IV

Answer 48

The correct answer is: B - I,II, and III
Explanation
The institution invests the cash deposit in various money market instruments like T-bills and CDs, this would provide the investor with a premium interest rate.

Question 49

[1012658] Which of the following are classifications of hedge fund?
IEvent driven
IIMarket neutral
IIILong/short funds
IVTactical trading
AI, II, and III BI, II, III, and IV CIII only DI, II, and IV

Answer 49

The correct answer is: B - I, II, III, and IV
Explanation
All of these represent general investment objectives of hedge funds.

Question 50

[1017567] In relation to derivatives, which of the following is/are correct?
IDerivatives can be used to increase market risk
IIDerivatives can be used to decrease market risk
AI only BII only CBoth DNeither

Answer 50

The correct answer is: C - Both
Explanation
Using derivatives for speculative purposes would increase an investor’s exposure to market risk.
Using derivatives for hedging purposes would decrease an investor’s exposure to market risk.

Question 51

[1049210] An investor pays £100,000 into an investment bond with an insurance company. Assuming no earlier withdrawals are made, what sum can be withdrawn from the bond at the end of year three without incurring a chargeable event?
A£5,000 B£10,000 C£15,000 D£100,000

Answer 51

The correct answer is: C - £15,000
Explanation
The 5% rule allows 5% of the original capital to be taken from a life bond per year on a cumulative basis. This means that 3 x £5,000 i.e. £15,000 can be taken without incurring a chargeable event.

Question 52

[1017592] Which of the following are often unregulated?
AVenture Capital Trusts BHedge Funds CReal Estate Investment Trusts DInvestment Trusts

Answer 52

The correct answer is: B - Hedge Funds
Explanation
A hedge fund is a common term used for unregulated collective investment schemes. These funds have no restriction on what they can and cannot invest.
The other funds have set restrictions on what they can and cannot invest in, and how they handle certain of their affairs. For example, there are restriction on the size of the company that VCTs can invest in and a REIT must distribute at least 90% of its income.

Question 53

[1017604] Real estate investment trusts (REITs) can be held in which of the following tax wrappers?
IIndividual saving account
IISelf-invested personal pension
IIIChild trust funds
AI and II BII and III CI, II, and III DI only

Answer 53

The correct answer is: C - I, II, and III
Explanation
Investors in REITs buy shares, and these typically trade on a regulated market such as the London Stock Exchange’s official list. This qualifies them for inclusion in these tax efficient wrappers.

Question 54

[1040928] In a cash deposit account, when will the investor earn the most interest?
AWhen interest is paid semi-annually BWhen interest is paid monthly CWhen interest is paid annually DWhen interest is paid daily

Answer 54

The correct answer is: D - When interest is paid daily
Explanation
The more often interest is paid, the more interest will benefit from compounding.

Question 55

[1017586] Which of the following is NOT a feature of exchange-traded funds (ETFs)?
AETFs are open-ended BETFs follow the performance of an index closely CETFs use forward-pricing DETFs are not subject to stamp duty

Answer 55

The correct answer is: C - ETFs use forward-pricing
Explanation
Exchange-traded funds, as the name suggests, trade on the secondary markets, such as the London Stock Exchange. This allows investors to make purchases and sales at the current market price.

Question 56

[1017582] In relation to OEICs which of the following is incorrect?
IInvestors buy shares in the OEIC
IIOEICs usually have a dual price system
AI only BII only CBoth DNeither

Answer 56

The correct answer is: B - II only
Explanation
An OEIC is considered a company and investor will purchase shares in this company. However, these shares are the equivalent to the units in a unit trust. They can be accumulation or distribution units and they are valued at net asset value per share. Unlike unit trusts, however, shares in OEICs have a single price and should not be offered to clients as a bid/offer spread.

Question 57

[1049212] What type of option can only be exercised at expiry?
AAsian BAmerican CEuropean DBermudian

Answer 57

The correct answer is: C - European
Explanation
European options can only be exercised at expiry.

Question 58

[1049217] Fund X aims to achieve a positive return regardless of the direction of the market. What is this fund most likely to be?
ATracker fund BAlpha fund CAbsolute return fund DExchange traded fund

Answer 58

The correct answer is: C - Absolute return fund
Explanation
Absolute return funds aim to achieve positive returns that are unrelated to market movements.

Question 59

[1017603] What is the maximum percentage holding by a single shareholder in a REIT?
A5% B10% C15% D20%

Answer 59

The correct answer is: B - 10%
Explanation
The 10% maximum stake in a REIT is intended to prevent tax avoidance, primarily by property management companies who were given the opportunity to convert into REITs.

Question 60

[1070290] With a money purchase pension which is the most likely?
AThe pension will be determined by the interest rates on encash BThe amount deployed will be dependent on the tax rate paid CThe pension depends on the current LIBOR rate DThe pension is guaranteed regardless of payments

Answer 60

The correct answer is: A - The pension will be determined by the interest rates on encash
Explanation
With a money purchase pension, an investor / and or employer pays pension contributions into a chosen pension fund, also known as defined contributions. The ultimate value of the fund at retirement is unknown as it will depend upon how much is paid in each year, and on investment returns.
At retirement the investor has a number of options for their pension fund. The main one is the Open Market Option (OMO), which gives the investor the right to shop around on the open market to compare annuity rates i.e. compare the levels of pension offered by various companies that can be bought with the pension fund. These annuities are heavily influenced by interest rates.
‘The pension will be determined by the interest rates on encash’ reflects this idea.
Other factors that affect the level of annuity are your age, sex and health.
The budget of 2015 now allows retirees to be able to take the balance of their pension fund, post tax-free cash, as a further lump sum taxable at their highest marginal income tax rate. This eliminates the need to buy an annuity or set up drawdown arrangements.

Question 61

[1017612] Which of the following funds are often based offshore?
AVenture Capital Trusts BInvestment Trusts CLife Company Funds DHedge Funds

Answer 61

The correct answer is: D - Hedge Funds
Explanation
Hedge funds are often referred to as unregulated collective investment schemes. They benefit from very relaxed regualtion on what they can and cannot invest in. If based offshore, there may be certain tax advantages to the fund itself, although UK investors in these will be liable for UK tax.

Question 62

[1056988] In the private equity industry, which of the following is best description of carried interest?
AThe share of the proceeds from the fund paid to the Limited Partners BThe share of the investment from Limited Partners that is paid to the General Partners CThe share of the fund proceeds that are paid to the General Partners DThe interest that must be paid on the debt funding from banks

Answer 62

The interest that must be paid on the debt funding from banks
The correct answer is: C - The share of the fund proceeds that are paid to the General Partners
Explanation
General Partners (GP) will receive a management fee from the Limited Partner’s (LP) capital contribution.
Historically, annual management fees have been approximately 2% of the fund size. In addition to the management fee, the GPs also receive a portion of the proceeds from the fund. The portion of the proceeds in an investment that go to a GP are known as carried interest.

Question 63

[1017572] A call option on ABC plc is bought for a £1 premium. The strike price is £2 and currently ABC is trading at £2.50. Which of the following is correct?
IThe option is in the money
IIThe option has an intrinsic value of 50p, but no time value
AI only BII only CBoth DNeither

Answer 63

The correct answer is: A - I only
Explanation
Intrinsic value = the amount in the money i.e. £2.50 - £2 =0.50p
Time value = Premium - Intrinsic Value.

Question 64

[1017568] Farmer Giles grows wheat during the growing season and sells it at harvest time. He wants to hedge price risk using futures contracts. Which of the following is/are correct?
IHe should take a long position in wheat futures
IIHis main concern is of prices falling
AI only BII only CBoth DNeither

Answer 64

The correct answer is: B - II only
Explanation
His concern is clearly of prices falling. If they do, he will get less for his wheat come harvest time. To protect himself against this he needs an investment that will make money in a falling market. This is what a short future does, so sell futures, i.e. go short.
Essentially, the farmer will be agreeing to sell wheat come harvest time at a price that he agrees to today.

Question 65

[1040163] Which of the following investment markets can be regarded as highly volatile and unregulated?
APut options BFine wines CREITs DJunk bonds

Answer 65

The correct answer is: B - Fine wines
Explanation
Fine wines are regarded as a tangible moveable objects, or chattels. They tend to be illiquid and unregulated markets. Another major disadvantage is illiquidity.

Question 66

[1017570] Bud Fox is a UK equity fund manager specialising in blue chips. His forecast for the near future is not good and he anticipates a substantial fall in the value of the UK equity market. Which of the following derivative strategies would be appropriate?
ASell a put option BBuy a call option CSell a FTSE 100 Future DBuy a FTSE 100 Future

Answer 66

The correct answer is: C - Sell a FTSE 100 Future
Explanation
Sell a FT100 Future - if the market falls, he wins on the future.

Question 67

[1017589] Real estate investment trusts (REITs) must distribute what percentage of their profits as dividends?
A70% B80% C90% D100%

Answer 67

The correct answer is: C - 90%
Explanation
REITs benefit from tax advantages within the fund. Specifically they do not pay tax on any income or capital growth within the portfolio of assets. As a condition of this tax advantage a REIT must distribute at least 90% of its income to investors.

Question 68

[1017607] What is the most accurate description of a venture capital trust (VCT)?
AIt is an investment trust that invests in other investment trusts BIt is a quoted company on the London Stock Exchange that invests in other quoted companies CIt is an investment trust that invests in unit trusts and OEICs DIt is a quoted company on the London Stock Exchange that invests in unquoted companies

Answer 68

The correct answer is: D - It is a quoted company on the London Stock Exchange that invests in unquoted companies
Explanation
A VCT is a quoted company and is constituted in a very similar way to an investment trust company. The key difference is that its investment focus is on very small, riskier companies.

Question 69

[1017580] An investment company with variable capital is also known by what other name?
AInvestment Trust BOEIC CLife Company DUnit Trust

Answer 69

The correct answer is: B - OEIC
Explanation
ICVCs are also known by the term Open Ended Investment Company (OEIC). These are open ended collective investment schemes.

Question 70

[1017578] Which of the following is incorrect?
IUnit trusts are open ended
IIInvestment trusts are closed ended
IIIOEICs are closed ended
AI only BI and II CIII only DI and III

Answer 70

The correct answer is: C - III only
Explanation
OEICs are open ended. They are essentially the same in composition as a unit trust, but they are constituted as a company.

Question 71

[1049206] Which of the following is true of ETF shares and stamp duty?
AETF shares incur stamp duty at 0.5% rounded to the nearest pound BETF shares incur stamp duty at 0.5% rounded to the nearest penny CETF shares incur stamp duty at 1.5% rounded to the nearest penny DETF shares do not incur stamp duty

Answer 71

The correct answer is: D - ETF shares do not incur stamp duty
Explanation
ETF shares do not incur stamp duty.

Question 72

[1017579] Which of the following has trustees?
AOEICs BInvestment Trusts CLife Companies DUnit Trusts

Answer 72

The correct answer is: D - Unit Trusts
Explanation
The only trust is the Unit Trust. Although OEICs are essentially the same in composition as a unit trust, but they are constituted as a company. The full name for an investment trust is an investment trust company, and like life companies, have the constitution of a company.

Question 73

[1070295] What is the maximum amount that can be invested in cash in a Junior ISA in the current tax year?
A£3,600 B£4,368 C£9,000 D£20,000

Answer 73

The correct answer is: C - £9,000
Explanation
Junior ISAs are individual savings accounts for children. The accounts offer parents a tax-free way of saving for children who do not have a child trust fund (CTF). Children can have a Junior ISA if they are under 18 years of age, live in the UK and do not already have a CTF. Anyone can put money into a Junior ISA. The total limit is £9,000 per year.

Question 74

[1070008] Which of the following represent common risks faced by investors in both physical and synthetic ETFs?
IGearing of the fund
IIFailure of the counterparty of the ETF provider
IIIPoor quality collateral held by the ETF provider
IVIncreasing regulation of derivatives
AI and II only BI and III only CII and III only DII and IV only

Answer 74

The correct answer is: C - II and III only
Explanation
A synthetic ETF would gain exposure to the required assets through derivatives, such as a total return swap. The ETF provider would invest the cash obtained from investors in collateral. The returns on the collateral would be swapped with a counterparty for returns on the required asset. If the counterparty defaults, then the ETF provider would not be able to make the required payments to the ETF. If the collateral is illiquid, then the ETF provider may fail to return the capital to investors.
A physical ETF provider would use the cash obtained from investors to buy the underlying assets. To boost returns, the ETF provider would likely lend the assets to a counterparty in return for collateral. The investor faces the risk that the counterparty defaults and fails to return the assets borrowed, and they also face the risk that if the collateral is of poor quality, then their capital would be at risk.
The gearing of the fund, and the increasing regulation of derivatives, would impact synthetic ETFs, NOT physical ETFs.

Question 75

[1017758] A downward sloping yield curve means what?
AShort term yields are lower than long term yields BA flat level of yields across all maturities CLong term yields are higher than short term yields DShort term yields are higher than long term yields

Answer 75

The correct answer is: D - Short term yields are higher than long term yields
Explanation
A downward sloping yield curve is sometimes called inverted or abnormal. It shows the market offering investors a higher yield (or return) on short dated assets and a lower yield on long dated assets. This is not what a rational investor would normally expect.

Question 76

[1017583] Which of the following is/are traded on the London Stock Exchange?
IUnit trusts
IIOEICs
IIIInvestment Trusts
AI and II BII and III CIII only DI, II, and III

Answer 76

The correct answer is: C - III only
Explanation
The units in a unit trust and the shares in an open ended investment company can only be bought from and sold to the manager/authorised corporate director. Investment trust (companies) are genuine companies the shares in which are freely transferable on the secondary markets.

Question 77

[1017675] For overseas funds to have reporting status, they must satisfy which of the following conditions?
IPrepare accounts in accordance with an acceptable accounting policy
IIProvide information of reportable income to HMRC
IIIProvide information of reportable income to investors
IVProvide information to HMRC as requested
AI only BII and III only CI,II, and III only DI,II,III, and IV

Answer 77

The correct answer is: D - I,II,III, and IV
Explanation
Overseas funds with reporting status are treated, for tax purposes, the same as UK-based funds.