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Investment Practice > Exam questions > Flashcards

Exam questions Flashcards

1
Q

What does the accruals/matching concept state?

A

That costs should be allocated to the periods where revenues are generated. Depreciation involves allocating the costs of a fixed asset over its useful economic life.

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2
Q

If a company makes a provision for the first time against the estimated amount of doubtful debt, this will:

A

Reduce reported profits for the year.
The increase in the provision will represent the full amount of the charge for the year. Effectively we are recognising the cost by putting the provision in the account.

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3
Q

Accruals and deferred income would be found in which category in a company’s accounts?

A

Current liabilities. Accruals are liabilities owed for services used during the chargeable accounting period, but not yet paid for.

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4
Q

Which of the reserves can be used to make a bonus issue (issuance of free shares to existing shareholders)?

A

All reserves within shareholders’ funds can be used for a bonus/capitilisation issue.

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5
Q

Where would prepayments be found in a set of accounts?

A

Current assets. Prepayments will occur if a company has paid for a service, but not yet had the benefit during the accounting period. The service is owed to the company and therefore shown as a current asset.

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6
Q

From a cash flow perspective, what is the significance of an increasing inventory?

A

It suggests the company is spending cash on increasing current assets, as a result cash position ↓

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7
Q

From a cash flow perspective, what is the significance of accounts receivable decreasing?

A

The company is receiving cash from debtors, cash position ↑

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8
Q

From a cash flow perspective, what is the significance of accounts payable increasing?

A

The company is not paying their debtors, cash position ↑

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9
Q

From a cash flow perspective, what is the significance of depreciation being charged on assets?

A

The company is not spending any money on depreciation, it is an accounting entry only, cash position ↑

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10
Q

What are the scales (possible range) for R-squared and the correlation coefficient in regression analysis?

A

R-Squared: 0 to 1

Correlation Coefficient: -1 to +1

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11
Q

How is the Nikkei 250 weighted?

A

It is equally weighted (not by market cap). Each of the 250 companies each contribute an equal share towards the index value.

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12
Q

Where does the Nikkei 250 trade and where do Nikkei 250 futures trade?

A

Nikkei 250 trades in Tokyo, and its futures trade in Osaka and Singapore

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13
Q

What are the maturity categories used to divide UK government bonds for index definition?

A 
Up to 5 years,
5 to 10 years,
5 to 15 years,
10 to 15 years,
Over 15 Years
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14
Q

What does Autocorrelation suggest?

A

That returns from one period are in some way connected to those of another

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15
Q

What does mean if something is statistically significant?

A

If an observed value is noticeably different from expectations.

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16
Q

What is working capital equal to?

A

Net current assets (current assets-current liabilities)

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17
Q

What is interest cover?

A

EBIT / interest expense

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18
Q

How are preference share dividends classed?

A

Franked investment income

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19
Q

Why are UK Treasury Bills issued at a discount?

A

They pay no interest

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20
Q

The Bank of England conducts its interest rate policy through what:

A

Its repo operations (gilt repos)

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21
Q

Why invest in Commercial Paper?

A

It is a short-term instrument issued at a discount to par value. The investor will therefore experience a capital gain when held to maturity.

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22
Q

What is the minimum block size for Treasury Bills?

A

£20,000

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23
Q

If interest rates fall, what would happen to the price and yield of a floating rate note?

A

Price would remain the same and yield would fall.

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24
Q

What has lower risk: senior unsecured debt or subordinated debt (debt paid after all other corporate debts)?

A

Senior Unsecured Debt

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25
Q

What is a droplock FRN?

A

Once the interest hits a specified minimum, the on locks into that rate for its remaining life

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26
Q

How many shares does each equity option contract consist of?

A

1,000 shares

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27
Q

How is coffee classed (as a commodity)?

A

As a soft

Softs: foodstuffs

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28
Q

How often do commercial leases have rent reviews?

A

Every 5 years

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29
Q

What is an intitial margin?

A

A refundable good faith deposit based on the worst probable one day’s loss. It is calculated as a net figure by ICE Clear Europe.

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30
Q

Where are covered warrants traded?

A

On the LSE and settlement is carried out through CREST.

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31
Q

How do you calculate hedge efficiency?

A

absolute gain on future / absolute gain on cash market

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32
Q

Would a depositer wishing to hedge against a fall in rates go long or short?

A

Depsiters go long to hedge.

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33
Q

What would be the effect if the exercise price of a warrant were to increase?

A

The price of the warrant would decrease

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34
Q

What best describes the macro-economy according to the Monetarist school of thought?

A

Supply and demand are in equilibrium

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35
Q

how do you work out the price of an undated yield?

A

par value * (coupon/yield)

36
Q

What is the difference between technical and fundamental analysis?

A

Fundamental analysis evaluates securities by attempting to measure their intrinsic value.
Technical analysis differs from fundamental analysis, in that traders look to statistical trends in the stock’s price and volume.

37
Q

Weak,semi-strong and strong form efficiency:

A

Weak: historical information reflected in share price.
Semi-strong: historical and public information reflected in share price
Strong: historical, public and private information reflected in share price

38
Q

M0:

A

Cash in circulation plus banks’ till money and deposits at the Bank of England

39
Q

What is regret avoidance?

A

The failure of investors to realise a loss in the hope that it will be reversed

40
Q

What is a credit spread?

A

A credit spread is the difference in yield between two bonds of similar maturity but different credit quality.
A coupon has little impact on a corporate bond’s credit spread.

41
Q

Can a dividend be missed with a preference share?

A

Yes, but it would normally be pad cumulatively in arrears thereafter

42
Q

The yield curve is the plot of:

A

Redemption yields against time

43
Q

What is the PTM levy and when is it applied?

A

The PTM levy is a £1 charge automatically applied to investors when they buy or sell shares with a total value of over £10,000.

44
Q

When must group/consolidated accounts be produced?

A

When a company holds 50% or more of the shares of another company it must prepare group accounts.

45
Q

Dividend cover:

A

EPS/DPS. or Earnings Yield / Dividend Yield

46
Q

When would Enterprise Value to Sales be an appropriate valuation technique?

A

When comparing firms that operate with different capital structures/rates of taxation.

47
Q

What is most likely to cause a shift in the Phillips Curve?

A

A change in the natural rate of unemployment

48
Q

For a zero-coupon bond, what is true of its modified duration?

A

It will be less than the bond’s Macaulay duration.

49
Q

Where are short-term £ interest rates traded?

A

ICE Futures Europe

50
Q

Capital Employed:

A

Total assets - Current liabilities

Equity + Non-current liabilities

51
Q

What is a disadvantage for holding CFDs?

A

Investors do not own the instrument and therefore have no influence/voting rights.

52
Q

What is the normal life of a French Government Bond (OAT)?

A

Between 7 and 30 years

53
Q

UK Current, Capital and Financial Accounts:

A

Current Account: The difference between a country’s savings and investments.

Capital Account: Records the flow of goods and services in and out of a country.

Financial Account: Measures increases or decreases in international ownership assets.

54
Q

What is the maximum maturity on issue for commercial paper in the UK market?

A

12 months

55
Q

Correct order in a liquidation:

A
  1. Preference shares
  2. Ordinary shares
  3. Deferred shares
  4. Warrants
56
Q

Only the share premium forms a part of the reserves

A

Only the share premium forms a part of the reserves

57
Q

What is the variation margin?

A

It is designed to cover daily losses made.

58
Q

What kind of analysis is an active fund manager considering investment over a specified period carrying out?

A

Horizon analysis: This is where a fund manager will construct a portfolio where cash flows match liabilities over a specified period.

59
Q

How do you calculate beta for bond portfolios?

A

Dp / Dm

60
Q

How do you work out the value of a right following a rights issue?

A

TERP - Subscription Price

61
Q

When are spot currency transactions settled?

A

T + 2

62
Q

Which sector is likely to benefit in a bear market?

A

Consumer staples

63
Q

What is a key difference between hedge funds and conventional funds?

A

Hedge funds are generally less liquid investments than conventional funds.

64
Q

What is the key difference between a warrant on ordinary shares and an exchange-traded call option on ordinary shares?

A

Exercise of a warrant will increase the number of shares in the company, unlike the exercise of the
call option

65
Q

What is the primary motivation for a fund manager to lend stocks?

A

To enhance returns

66
Q

The Keynesian model for an economy describes the:

A

Short term adjustment of the economy where prices and wages are ‘sticky’

67
Q

When may the price/cash flow ratio be used to determine whether a company is undervalued or overvalued relative to similar companies?

A

If the analyst is concerned that the
accounting practices of the firm are dubious. The price/cash flow is the ratio which would be
least impacted by accounting distortion.

68
Q

Product Life Cycle:

IGMDO

A 
Introduction
Growth Phase
Maturity
Decline
Obsolescence
69
Q

Porter’s Five Forces:

NISSB

A 
New Entrants
Industry Competitors
Substitutes
Suppliers
Buyers
70
Q

If modified duration is used to estimate the price of a bond following a change in
yield, then the impact of convexity means that the estimated price will be:

A

Lower than the actual price if yields fall, and lower than the actual price if yields rise

71
Q

Stamp duty reserve tax (SDRT) is charged at:

A

0.5% on the purchase of all eligible securities

72
Q

How do International accounting standards require that goodwill in a business combination is recorded?

A

In the balance sheet at cost less accumulated impairment charges.

73
Q

What is true regarding the nature of normal distribution?

A
  • 68.26% of all values fall within 1 σ of mean.
  • 95% of all values fall within 1.96 σ of mean.
  • 99% of all values fall within 3 σ of mean.
74
Q

Who is the legal owner of the assets held by a unit trust?

A

The Trustee (Bank/Insurance Company).

The Trust Manager has the responsibility of the investment management decisions.

75
Q

How do you calculate the dividend growth rate?

A

g = ROE * Proportion of Retained Earnings

76
Q

Under national income accounting, overall economic activity can be measured by what means?

A

The value of consumer purchases
The value of output by firms
The value of expenditure by firms on inputs

77
Q

What ratings have are given “notches” of 1,2,3 and which are given +/-?

A

Moody’s: 1,2,3

S&P/Fitch: +/-

78
Q

What are the Investment Grade ratings for Moody’s and S&P/Fitch?

A

Moody’s: Aaa, Aa, A, Baa

S&P/Fitch: AAA, AA, A, BBB

79
Q

What are the Non-Investment Grade ratings for Moody’s and S&P/Fitch?

A

Moody’s: Ba, B, Caa

S&P/Fitch: BB, B, CCC

80
Q

What are the Bankruptcy/Default ratings for Moody’s and S&P/Fitch?

A

Moody’s: Ca, D

S&P/Fitch: C, D

81
Q

How do you calculate an option’s delta value?

A

Delta = Change in Option Price / Change in Underlying

82
Q

What does the Statement of Changes in Equity tell us?

A

Opening balance, cost of goods bought/sold during the past year, profit/loss, closing balance

83
Q

Companies operating in which markets would maximise their profits by producing where MR=MC?

A

All markets

84
Q

What kind of index is the NIKKEI 250?

A

Unweighted Arithmetic Index

85
Q

When price volatility increases over time, what is the likely effect on correlations between securities?

A

To increase

86
Q

In a private equity partnership, which of the following terms best describes the investment managers?

A

General partners

Investors are limited partners

Investment Practice (12 decks)

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