IAD Level 2 - Mock 1 Flashcards
An investor buys into large market capitalisation Asian equity. As she is interested in return from income, which of the following ratios would be of interest?
A. Flat yield
B. Gross Redemption Yield
C. Dividend cover
D. Dividend Yield
D. Dividend yield.
The dividend yield is calculated as dividend/market price. If this number is high it means that the share price is low in relation to the dividend, the alternative is true if the number is low.
Dividend cover is the ratio of the company’s annual net income over the dividend paid to shareholders, calculated as net profit or loss attributable to ordinary shareholders by total ordinary dividend.
So, net profit / dividend per share = dividend cover
Generally a dividend > 2 is considered a ‘safe’ coverage.
An investor specialises in selecting stocks that have been largely ignored by the market and display low price-to-book ratios. What style of investing is the investor following?
A. Growth Investing
B. GARP Investing
C. Momentum Investing
D. Value Investing
D. Value investing.
Value investing involves selecting stocks that have been largely ignored but will, hopefully, become successful/popular again.
GARP investing stands for Growth at Reasonable Price and applies when the price-to-earnings ratio is less than growth.
So, GARP = P/E < Growth.
David earns £54,000 per year and his wife, Lisa, works part-time in a body repair workshop earning £18,500. The couple have recently inherited a windfall of £80,000 cash.
Assuming that David has made the maximum pension fund contributions in previous years, which of the following is the maximum percentage of this windfall that David could put into his personal pension, gaining full tax advantage?
A. 100%
B. 63%
C. 50%
D. 40%
D. 40%.
The maximum that David will receive as tax relief is 100% of annual earnings up to a maximum gross contribution of £40,000. 20% of this will be tax relief so David’s contribution will be £40,000 x 0.8 = £32,000. This is 40% of the windfall.
Further explanation:
Taxpayers can get tax relief on up to £40,000 of pension contributions. This is a gross (pre-tax) figure.
If someone puts money into a personal pension from net (taxed) money, they will receive a 20% tax rebate direct into their pension from HMRC. E.g. if they put in 8,000 net, HMRC will top it up to 10,000 (i.e. they have added back the 20% tax).
HMRC will always add the basic rate regardless of your tax band. If you are a higher-rate taxpayer, you need to claim the rest directly from HMRC.
Which of the following is true of Exchange Traded Commodities?
I. ETCs incur stamp duty
II. ETCs are open-ended
III. ETCs can be ISA wrapped
A. I and II
B. II and III
C. II only
D. I only
B. II and III only.
ETCs are open-ended and can be ISA wrapped, but do not incur stamp duty.
Dave has a moderate attitude to risk, and rather than invest directly in gold, he chooses to invest in the shares of a gold mining company. Which of the following show a non-systematic and systematic risk that he is exposed to?
A. An economic crash similar to 2008 and the company mines being flooded due to extreme weather
B. Interest rates increasing, and the company being fined for fraud
C. The price of gold falls and the UK adopts the gold standard
D. The company suffers from volatile profits and 50% of the management resign
B. Interest rates increasing and the company being fined for fraud.
The economic crash, weather, interest rates rising, the price of gold falling and the UK adopting the gold standard are all systematic risks.
The company being fined for fraud, suffering volatile profits and losing its management are non-systematic risks.
The only choice giving both a systematic and non-systematic risk is where interest rates rise (systematic) and the company is fined for fraud (non-systematic).
The risk of a share performing differently from other shares is known as:
A. Systematic risk
B. Sector risk
C. Market risk
D. Unsystematic risk
D. Unsystematic risk.
Unsystematic risk is also known as idiosyncratic risk or specific. It is the risk that relates specifically to the individual company.
Systematic risk is the risk that relates to investing in shares and bonds rather than other investments.
Nigel purchases a commercial property in 1999 for £100,000 and incurs £750 legal costs during the purchase. During his ownership, he spends £10,000 improving and modernising the property. In the fiscal year, he disposes of the property for £230,000, paying £700 in fees and commissions.
Assuming an annual exemption of £12,300, calculate Nigel’s chargeable gain.
A. £230,000
B. £229,000
C. £118,250
D. £106,250
D. £106,250.
The chargeable gain would be calculated as follows:
Proceeds: £230,000
Cost of disposal: (£700)
Net proceeds: £229,300 Cost of purchase: (£100,000)
Incidental costs of purchase: (£750)
Enhancement expenditure: (£10,000)
Gain on asset: £118,550
Annual exemption: (£12,300)
Chargeable gain: £106,250
Allowable deductions from capital gains include: - the cost of the asset, incidental costs of purchases and sales, - capital expenditure on improving the asset.
Note that costs incurred for maintenance are NOT deductable.
Investing in high coupon gilts is the most tax effective for which of the following situations?
A. An individual who does not pay income tax
B. An individual who pays a high level of tax on income
C. Making a large capital gain on the gilts
D. Making a small capital gain on the gilts
A. An individual who does not pay income tax.
Since bonds do not suffer capital gains tax, the investor is not concerned about the tax implications of selling the bond and making a capital gain.
Coupon income is taxable, however, and thus the most tax-effective situation is where high coupons can be received and the investor pays no tax on income.
Foreign investors will often not pay tax on UK investment income.
What percentage of a Life Bond can be taken from the original capital as income per annum on a tax-deferred basis?
A. 2%
B. 5%
C. 10%
D. 15%
B. 5% of the original bond can be taken tax deferred per annum.
Carolyn bought a call option giving her the right to buy a share for $5. The premium on the option was $0.50. At what price does the share need to be for the option to be AT-THE-MONEY?
A. $0.50
B. $4.50
C. $5.00
D. $5.50
C. $5.00.
An option is at the money when the strike price is equal to the asset price.
Upon spending £10,000 to buy into a UK equity unit trust, Paul Fry receives 2,000 units. His first distribution payment is worth £2 per unit, and he receives the income split into two parts of £1.50 and 50p. He notices that the £1.50 payment is referred to as the distribution and the 50p payment is referred to as an equalisation payment.
Since Paul is a higher-rate taxpayer, what tax would he need to pay to HMRC?
Assume any dividend allowance has already been used.
A. £262
B. £750
C. £1,012
D. £1,181
C. £1,012.
As the equalisation payment is simply a return of the investor’s money, it is not liable to income tax. The tax is only applied to the normal distribution of £1.50.
Total taxable income received = 2,000 x £1.50 = £3,000.
Tax to be paid = £3,000 x 0.3375 = £1,012
An investor has £40,000 invested in a fixed-term savings account in a UK bank offering a fixed rate of interest for the term invested. Which of the below puts the order of risk exposed to the investor from the highest to the lowest?
A. Capital risk, operational risk, interest risk and inflation risk
B. Interest risk, inflation risk, operational risk and capital risk
C. Inflation risk, capital risk, interest risk and operational risk
D. Capital risk, inflation risk, interest risk and operational risk
B. Interest risk, inflation risk, operational risk and capital risk
As it is a fixed rate interest, the investor may lose out on extra interest should interest rates increase.
If the interest earned is below the inflation levels, then the value of money is being eroded through inflation.
Operational risks could include human errors which all banks would be exposed to.
Capital risk is where you can lose some or all of your initial investment, which will be last as UK banks are covered by FSCS scheme, which gives protection of up to £85,000 per investor for deposits.
Jason Knight, a higher-rate taxpayer has made a capital gain on a holding of corporate bonds. What is his tax position on the gain?
A. He will be liable for 40% Capital Gains Tax on the gain
B. He may use his CGT allowance (if available) and then be liable to 10% on the balance
C. He may use his CGT allowance (if available) and then be liable to 20% on the balance
D. He has no tax to pay
D. He has no tax to pay.
There is no CGT on corporate bonds unless they were convertible corporate bonds, which the question did not stipulate that they were.
A portfolio manager allocates his assets equally between equity and debt and receives a return of 16.2% over the course of the year.
During that time, the stock market gained 8% and the bond market lost 3%. The weightings of the benchmark, meanwhile, was 70% equity and 30% debt.
In terms of asset allocation, what was the manager’s performance in comparison to the benchmark?
A. -2.2%
B. +2.2%
C. -4.7%
D. +2.5%
A. -2.2%.
Ending value of portfolio = 108% x 50% (equity) + 97% x 50% (debt) = 102.5%
Ending value of benchmark = 108% x 70% (equity) + 97% x 30% (debt) = 104.7%
The portfolio UNDERPERFORMED the benchmark by 104.7% - 102.5% = 2.2%
You are a bond fund manager who is trying to immunize her bond portfolio. You have been asked to look into the following factors:
Factor A: Default risk of the bonds in the portfolio
Factor B: Changes in the yield curve
Factor C: Duration of the bonds in the portfolio
Which of the factors would concern you the most with respect to the immunization of your portfolio?
A. Factors A and C
B. Factor A only
C. Factors B and C
D. All of the stated factors
C. Factors B and C.
The goal of immunisation is to protect the portfolio against adverse movements in interest rates, in other words, changes in the yield curve.
The degree to which the portfolio will be affected by changes in the yield curve will depend on the duration of the bonds in the portfolio.
While default risk is very important for any bond fund manager, it is not a factor in the immunization process.
