IAD Level 2 - End of Book Mock Flashcards
The time value of money is used to calculate which of the following?
A. The period an investment will be held for
B. The amount needed now to produce a future sum
C. The impact of inflation on a published interest rate
D. The annual percentage of an account
B. Time value of money is used to calculate the amount needed now (i.e., the present value) to produce a future sum.
During the course of a typical economic cycle, an investment manager made the following strategic switches:
Switch A - Defensive equities to interest-rate-sensitive equities
Switch B - Exchange-rate-sensitive equities to basic industry equities
Switch C - Cyclical consumer equities to commodities
Switch D - General industrial equities to capital spending equities
Assuming these switches were theoretically sound, which of the following statements is true?
A. Switch A occurred at the peak of the bull market
B. Switch B occurred during the early part of the bear market
C. Switch C occurred as inflation began to cause concern
D. Switch D occurred as the recession took hold
C. Switch C occurred as inflation began to cause concern (Chapter 2, Section 7.2).
Switch A - likely to occur at the start of a bull market
Switch B - likely to occur during the growth phase of a bull market
Switch C - likely to occur when growth decelerates as interest rates rise to suppress inflation
Switch D - likely to occur during the growth phase of a bull market
An investor recently made four purchases:
Purchase 1 - £10,100 worth of government bonds
Purchase 2 - £20,100 worth of exchange-traded funds (ETFs)
Purchase 3 - £30,100 worth of bank shares, processed using CREST
Purchase 4 - £40,100 worth of engineering company shares, processed using a stock transfer form
Which of the following statements is true?
A. Stamp duty will only apply in the case of Purchase 2
B. Stamp duty reserve tax will only apply in the case of Purchase 3
C. Only the stamp duty calculation for Purchase 1 needs to be rounded to the nearest £5
D. Only the stamp duty calculation for Purchase 4 needs to be rounded to the nearest penny
B. Stamp duty reserve tax will only apply in the case of the purchase of shares processed using CREST.
CREST-based share purchases trigger stamp duty reserve tax (SDRT), whereas stock transfer form purchases trigger stamp duty (rounded to the nearest £5).
Purchases of Gilts and ETFs do not trigger stamp duty.
The following measurements relate to the performance of a particular investment over a ten-year period:
Annual average return = 6.60%
Standard deviation = 2.20%
Variance = 4.84%
As a result of this data, an investor can expect that there is two-thirds chance of the annual return falling within the range of:
A. 1.76% and 8.80%
B. 1.76% and 11.44%
C. 4.40% and 8.80%
D. 4.40% and 11.44%
C. 4.40% and 8.80%.
There is two-thirds chance that the annual standard deviation will fall within one standard deviation of the mean, i.e., 6.60% + 2.20% and 6.60% - 2.20%.
What is the main difference between strategic and tactical asset allocation?
A. In strategic asset allocation, the decisions on the portfolio mix are taken from a long-term perspective. Tactical asset allocation engages in short-term tactical deviations.
B. In tactical asset allocation, the decisions on the portfolio mix are taken from a long-term perspective. Strategic asset allocation engages in short-term tactical deviations.
C. Strategic asset allocation involves timing the market, whereas tactical asset allocation involves taking a long-term view on markets.
D. Strategic asset allocation is an active investment approach, whereas tactical asset allocation is a passive investment strategy.
A. In strategic asset allocation, the decisions on the portfolio mix are taken from a long-term perspective; tactical asset allocation engages in short-term tactical deviations.
Strategic - long term
Tactical - short term
If it finds in favour of a complainant, what is the maximum the Financial Ombudsman Service (FOS) can award, in monetary times? Not including the complainant’s cost and any award for suffering, damage to reputation, distress or inconvenience.
A. £85,000
B. £150,000
C. £160,000
D. £375,000
D. £375,000 plus the complainant’s cost and an award for suffering, damage to reputation, distress, or inconvenience, if appropriate.
An individual places £10,000 on deposit, earning interest annually at a rate of 3.5%. If the annual rate of inflation is 1.8%, what is the real value of the investment at the end of two years?
A. £10,336.78
B. £10,350.00
C. £10,363.24
D. £10,712.25
A. £10,336.
Interest in real terms is 1.035 / 1.018 - 1 = 1.67%
Compounded for two years = £10,000 x (1 + 0.0167)^2 = £10,336.78
A client requests your advice on holding cash and explains that they are happy to accept an element of illiquidity for a higher rate of interest. Which of the following is likely to offer the best return?
A. Notice account
B. Fixed-term deposit
C. Current account
D. Money market account
D. Money market account.
Keep in mind that money market accounts require a high minimum deposit and balance to invest, usually much higher than savings accounts.
Investor’s money will not be as liquid as a regular saving account.
Withdrawals are allowed, but there is a limit to how many can be made.
How is income treated in a constant net asset value (CNAV) money market fund?
A. It accrues daily and is paid to the investor
B. It accrues monthly and is rolled up
C. It accrues daily and can be reinvested or paid out
D. It accrues monthly and is reflected in a higher share price
C. CNAV money market funds accrue daily and can be reinvested or paid out.
There are two types of money market funds: constant net asset value (CNAV) and accumulating net asset value (ANAV). Unit/shares in CNAV funds are issued with an unchanging face value (such as £1 per share). Income in the fund is accrued daily and can either be paid out to the investor or used to purchase more units/shares in the fund at the end of the month.
What additional risk are investors in synthetic exchange-traded funds (ETFs) exposed to, compared to investment in a physical ETF?
A. Interest rate
B. Liquidity
C. Counterparty
D. Currency
C. Counterparty.
Physical ETFs own the underlying assets.
Synthetic ETFs do NOT own the underlying assets; instead, they gain their exposure using derivative contracts negotiated with third-party investment banks or counterparties. Hence, synthetic ETFs are exposed to counterparty risk.
The difference in tax treatment between National Savings and Investments (NS&Is) guaranteed bonds and income bonds is that:
A. There is no difference - interest on both is taxable and paid gross, and no capital gains tax (CGT) is payable
B. Only income bond interest is paid net of tax, and no CGT is payable
C. Neither bond is subject to tax on income, but only the income bond may be subject to CGT on encashment
D. Neither bond is subject to CGT on encashment, but only the guaranteed income bond interest may be subject to higher rate tax in the hands of the investor
A. There is no difference - interest on both is taxable and paid gross and no CGT is payable.
No NS&I product is subject to CGT, however, some NS&I products are liable for income tax.
Bob has withholding tax assessed on a relief at source basis and Mary on reclaim basis. This indicates that:
A. Only Bob’s residence and tax status have been established in advance
B. Only Bob is entitled to claim a reduction on the full rate of withholding tax
C. Only Mary can benefit from a full rebate of the original amount of withholding tax
D. Only Mary can offset tax withheld against her domestic tax liabilities
A. Only Bob’s residence and tax status have been established in advance.
Withholding tax relief at source enables withholding tax to be reduced or not applied based on receipt of a notification of the investor’s status.
Where the reclaim basis is used, withholding tax is deducted, but some or all of it may be repaid to the investor upon submission of the appropriate paperwork.
Ria is buying a new main residence, but has decided not to sell her current main residence. She will have to pay the higher rates of stamp duty land tax (SDLT) for owning an additional property. How long does she have to sell her original main residence to be able to reclaim the difference between the normal rate and the higher rate of SDLT?
A. One year
B. Two years
C. Three years
D. Four years
C. She has three years to sell her original main residence in order to claim the difference between the higher- and normal rate of SDLT.
What is the current maximum amount of NS&I premium bonds that can be purchased by an individual investor?
A. £15,000
B. £25,000
C. £40,000
D. £50,000
D. £50,000.
The current minimum amount of NS&I bonds that can purchased is £25; the maximum amount is £50,000.
