IAD Level 2 - Final Questions Flashcards
Which of the following investors is most likely to invest in PIBS?
A. A non-taxpayer seeking annual fixed payments made net
B. A basic-rate taxpayer seeking semi-annual variable payment gross
C. A non-taxpayer seeking semi-annual fixed payments gross
D. A basic-rate taxpayer seeking annual fixed payments net
C. A non-taxpayer seeking semi-annual fixed payments gross.
PIBS (permanent interest bearing securities) are irredeemable fixed-interest securities issued by mutual building societies. PIBS pay relatively high semi-annual coupons and potentially offer attractive returns. Interest is paid gross, which means that PIBSs are attractive to zero-rate taxpayers and those who have some means of sheltering the gross payment. However, this income is non-cumulative and PIBSs holders rank behind all other creditors in the event of liquidation.
The following bids are made in an auction of UK Gilts through the DMO:
Bid 1: a bid for £1,000,000 nominal value.
Bid 2: a bid for £2,000,000 nominal value.
Bid 3: a bid for £480,000 nominal value.
Bid 4: a bid for £240,000 nominal value.
Which of the following is true?
A. 3 and 4 can only be made for index-linked gilts
B. 1 and 2 could be non-competitive bids
C. Only 3 could be a non-competitive bid
D. 1 and 2 would need to be made through GEMMs
D. 1 and 2 would need to be made through GEMMS.
Competitive bids must be made through GEMMs, and must be for at least £1,000,000 NV.
Non-competitive bids for conventional gilts must be below £500,000 NV and for index-linked gilts below £250,000 NV.
A split capital investment trust reaches the end of its lifespan and the managers liquidate the portfolio. Which of the following investors would be last in order of payment?
A. Income shares
B. Zero dividend preferred shares
C. Capital shares
D. Ordinary income shares
C. Capital shares.
Capital shares are the last to be paid on the liquidation of assets in a split capital investment trust. Zero dividend shares are paid first, then income and ordinary income shares.
Which of the following best defines tax-loss harvesting?
A. An annual scan of tax accrued and not paid by Her Majesty’s Revenue and Customs
B. Where robo-advisers sell loss-making investments to offset gains on others
C. Where net redemption yields are grossed up to compare pre-tax returns
D. Investing in tax wrappers such as individual savings accounts to minimise tax liabilities
B. Where robo-advisers sell loss-making investments to offset gains on others.
Some robo-advisers can also assess the CGT position of a portfolio, whereby they sell securities at a loss to offset gains in others, thus reducing the client’s tax bill – this process is called ‘tax-loss harvesting’.
Philippa needs to collect information on a new client to fulfil KYC requirements. A colleague suggests a questionnaire that could be completed during an interview with a client. What could be considered as a drawback to this?
A. The customer’s reaction to what they may perceive as a lengthy form-filling exercise
B. The information provided could be subjective and not provide the information needed
C. It would lead to inconsistency in records and difficulty in quality checking
D. The questionnaire can only provide useful information where there is one investment objective
A. The customer’s reaction to what they may perceive as a lengthy form-filling exercise.
There is no simple way of establishing all of this information quickly. Most firms use a KYC questionnaire that the adviser completes during their interview with the client so that the information is collected in a logical and straightforward manner and is available for later use. The advantage of this approach is in its consistency, the factual record it creates and the opportunity for quality checking that it provides. Its disadvantage is the customer’s reaction to what they may perceive as a lengthy form-filling exercise.
Which of the following is true of the withholding tax on eurobond interest?
A. It is nil
B. It is 10%
C. It is 20%
D. It is dependent on the investor’s marginal rate
A. It is nil.
Unlike the majority of corporate and government bonds, the coupons on eurobonds are paid gross.
A client is unable to provide sufficient information for her advisor to fully ascertain her investment profile. If the client wants the advisor to provide services, which of the following will be TRUE?
A. The advisor can not provide any services
B. The advisor should report the client to the appropriate authorities
C. The advisor can conduct business on the client’s behalf on a counterparty basis.
D. The advisor can conduct business for the client as long as he can show that he has made sufficient effort to obtain the necessary information.
C. The advisor can conduct business on the client’s behalf on a counterparty basis.
If the advisor does not have sufficient information in regard to the client’s investment profile, he would be unable to determine the suitability of the investment and therefore he or she should not make a recommendation. The advisor can, however, continue with the business after warning the client that any transactions will be carried out on an execution basis. The advisor is therefore treating the client as a ‘counterparty’ and although the term ‘counterparty basis’ is not expressly used in the textbook, we have to conclude that this is how the Examiner is using the term in this instance.
Gross domestic product (GDP) has not changed following the central bank’s decision to reduce the money supply. Which of the following are plausible according to the quantity theory of money?
A. There is a negative impact on the domestic currency
B. Deposit rates fall
C. The rate of inflation picks up
D. The number of transactions in the economy increases
D. The number of transactions in the economy increases.
According to the quantity theory of money, the following equation describes the relationship between the money supply and price level:
Money supply x velocity of circulation = price level x number of transactions.
A fall in the supply of money would likely increase interest rates and reduce inflation (indicated by the price level). If the price level falls (and GDP remains constant), we must assume that the number of transactions in the economy has increased.
Richard Etuhu has a taxable income of £28,000. He recently sold shares realising a total gain of £17,300 (excluding the personal allowance). Allowable costs of this sale were £650. A year ago Richard made losses of £850 and the year prior he made losses of £700. He has had no other recent gains.
Calculate his capital gains tax liability.
A. £280
B. £350
C. £1,422
D. £3,060
A. £280.
Capital gain = 17,300.
Less: Allowance £12,300, costs of sale £650, and losses of £850 and £700 gives £2,800.
Since his chargeable gain does not take his taxable income past the threshold of £37,700, his entire gain is taxed at the rate of 10% CGT @ 10%= 2,800 x 0.10 = £280.
Note: There is no expiry on the capital losses you can carry forward.
Phil Leakey is 40 years old in the current fiscal year. In this period he has a salary of £59,870; building society savings that generate £500 of interest; and investments in listed companies that generate £350 of dividend income.
Given the following information, calculate Phil’s total income tax liability.
Personal allowance: £12,570
Taxable income bands: Basic: £0 - £37,700
Higher: £37,701 to £150,000
Additional: Over £150,000
A. £13,883
B. £13,580
C. £12,700
D. £11,380
D. £11,380.
Always assume all tax allowances are still available unless we are told otherwise or the income is described as ‘taxable’. This means Phil is taxed on his non-savings income alone.
Taxable income bands: Salary = 59,870 PA = (12,570)
Taxable income = 47,300
Basic rate: 37,700 x 20% = 7,540
Higher rate: 9,600 x 40% = 3,840
Total tax = 7,540 + 3,840 = 11,380
Which of the following statements in regard to fundamental and technical analysis is FALSE?
A. Technical analysis is based on the premise that the market discounts everything
B. Fundamental analysis uses real data to determine the intrinsic value of a company
C. A technical analyst is not concerned about whether a stock is undervalued or overvalued
D. A fundamental analyst looks to buy where the intrinsic value is less than the actual share price
D. A fundamental analyst looks for companies whose shares are trading below their intrinsic value. If the analyst discovers a company whose intrinsic value is greater than its current share price, he would be likely to consider the shares undervalued and therefore worth buying.
Susanne is assessing the historic data on a share. She calculated that the share has a mean return of 4% and a standard deviation of returns of 3%. Which of the following is TRUE of the data being analysed?
A. The share delivered some returns below 1%
B. The average range of returns was -1% to 7%
C. The coefficient of variation was 3
D. The share did not deliver any returns above 7%
A. The share delivered some returns below 1%.
A standard deviation of 3% and a mean of 4% means that there is an average range of returns from 1% to 7%. This is 4% +or- 1s.d. In the data set there would have been values both within and without this range (approximately 68% of data will fall within the range. The coefficient of variation = sd / mean = ¾ = 0.75.
higher rate taxpayer wants to invest £100,000 over a 4-year time frame and wants an investment that will allow him to spread his risk while minimising his liability to capital gains tax. Which of the following vehicles would be the most suitable?
A. ETF
B. REIT
C. EIS
D. VCT
D. VCT.
Investing in a Venture Capital Trust (VCT) will provide an exemption from tax on any capital gains. An Enterprise Investment Scheme (EIS) offers a similar exemption if held for three years but an EIS is an investment into shares of an individual company. This particular investor is also looking to spread his risk so a VCT, which invests in a number of different companies, would be the best choice.
Direct investments are best suited to:
A. More wealthy clients
B. More risk tolerant clients
C. Potentially any client
D. Clients with diversified portfolios
A. More wealthy clients.
Direct investments include securities such as bonds and shares. The workbook states that they are usually best suited to clients with substantial sums to invest.
What is the relationship between ongoing charges figure (OCF) and reduction in yield (RIY)?
A. OCF is a UK requirement for funds that needs to be disclosed by UK UCITS firms alongside the EU requirement of the RIY
B. RIY is a UK requirement for funds that needs to be disclosed by UK UCITS firms alongside the EU requirement of the OCF
C. UK UCITS firms are exempt from the disclosure requirement of the less rigorous RIY figure if they disclose OCF
D. UK UCITS firms are exempt from the disclosure requirement of the less rigorous OCF figure if they disclose RIY
B. RIY is a UK requirement for funds that needs to be disclosed by UK UCITS firms alongside the EU requirement of the OCF.
OCF is not a comprehensive measure of charges, since it is only a measure of ongoing charges and not initial charges. UK firms are also required to include additional charges disclosures, which consist of a table showing the effect of charges in monetary terms and an RIY statistic.
