IAD Level 2 - Mock 5 Flashcards
Gonzalo invested a lump sum in to a portfolio some time ago. He has since made no further contributions or withdrawals.
Jorge invests different amounts of money in investments that he identifies as being underpriced or as having excellent growth potential in order to create his own fund.
Sergio has a standing order with a fund management group and pays in a set amount every quarter.
When considering the methods of calculating the return on the investments for the three investors, which of the following is TRUE?
A. Sergio is more likely to use the time-weighted rate of return than Jorge
B. Jorge is more likely to use the holding period rate of return than Gonzalo
C. Gonzalo is more likely to use the money-weighted rate of return than Sergio
D. Time-weighted and money-weighted rates of return would give the same results for Gonzalo and Sergio
A. Sergio is more likely to use the time-weighted rate of return than Jorge.
The holding period return is often referred to as a total return, and is useful where there are no additional contributions or withdrawals. This method best suits Gonzalo’s investment.
The money-weighted and time-weighted rates of return are useful for when there are injections and withdrawals. However, they do not tell the same story.
The time-weighted rate of return is not distorted by the weighting and timing of the cash flows invested. As market timing is not an aspect of Sergio’s investment strategy (he has a standing order that pays no regard to current market performance), he would not want his return distorted by this factor, so this would be better suited to his fund.
Jorge has a very active investment strategy. He places a lot of emphasis on the timings and amounts being invested, so his return should show this. The money-weighted rate of return would allow these factors to be included in the performance figures.
Western Bank are offering a semi-annual interest rate of 4%. What is the AER?
A. 8.16%
B. 8.06%
C. 7.96%
D. 7.86%
A. 8.16%.
The question already gives us the period rate. To turn it in to the annual equivalent rate (AER) we do the following:
(1+period rate)^n - 1
(1.04^2) -1 = 8.16%.
What is the benefit to a charity of a gift aid donation?
A. It receives a gift
B. The national lottery will match the gift
C. Funds are matched by the Band Aid foundation
D. The charity can reclaim tax from HMRC
D. The charity can reclaim tax from HMRC.
The charity can reclaim 20% tax from HMRC.
Blake Carrington, now well into his retirement, decides to start IHT planning and makes the following gifts to his family:
Jan 1st - Cash transfer of £200,000 to his daughter Lucy
Jan 3rd - Cash transfer of £125,000 into a discretionary trust for his son Robert
Jan 5th - Cash transfer of £20,000 to his granddaughter Crystal
Assuming no other assets , which of the following is/are correct?
I. The transfer to Lucy is only potentially exempt
II. The transfer to Robert will attract the lifetime rate of IHT
III. The transfer of £20,000 to Crystal will attract the chargeable lifetime transfer rate of IHT
A. I & III
B. II only
C. III only
D. None of the above
D. None of the above.
The transfer to Lucy is exempt as total assets are below the NRB.
The transfer to Robert is also exempt. It is cumulatively under the £325,000, i.e. £200,000 to Lucy + £125,000 to Robert = £325,000, so would NOT trigger the chargeable lifetime transfer rate of IHT.
The transfer to Crystal will not attract the chargeable lifetime transfer rate as this is only applicable for discretionary trusts.
Leonard is considering adding another stock to his existing portfolio, and is interested in the relative volatility of the stock compared to market average volatility. If Stock F has a beta of 0.95, which of the following statements is true?
A. Stock F is 5% more volatile than the market
B. Stock F is 95% more volatile than the market
C. Stock F is 5% less volatile than the market
D. Stock F is 95% less volatile than the market
C. Stock F is 5% less volatile than the market.
Stock F’s beta represents the relative volatility of stock F compared to the market average. Beta’s volatility is 95% of the market’s volatility – and so is 5% less volatile than the market average.
Under the pre-owned asset tax rules, no charge is made if the value of the benefit does not exceed what figure per annum?
A. £5,000 p.a.
B. £6,000 p.a.
C. £7,000 p.a.
D. £10,000 p.a.
A. £5,000 per annum.
The POAT exemption is applied where the benefit is valued at less than £5,000 per year.
When considering the current account element of the balance of payments in the economy, which of the following would be true? It measures:
A. Flows in relation to trade in goods and services and current transfers
B. Flows in relation to goods and services and overseas investments
C. Flows in relation to goods and services and overseas companies operating in the UK
D. Financial service activity in the economy only
A. Flows in relation to trade in goods and services and current transfers.
The current account considers short-term cash flows only. Overseas investment would be part of the capital account.
You are considering an investment in either commercial or residential property. Which of the following is/are correct about these property investments?
I. The landlord is responsible for repairs with a commercial property
II. The landlord is responsible for repairs with a residential property
III. Commercial property is typically let on 99 year leases
IV. Shops typically have higher yields than offices
A. I only
B. II only
C. I & II
D. I, II & IV
B. II only.
The landlord is responsible for repairs with a residential property, whereas it is the tenant who is responsible with a commercial property.
Nowadays commercial leases are normally a maximum of 25 years.
The yields from offices are higher than the yields from shops.
Which of the following would be a feature of an offshore fund?
A. Always pay no income or capital gains tax
B. In some cases may have to pay a low level of tax
C. Are always able to reclaim withholding tax
D. Are managed with tax efficiency as a focus
B. In some cases, the offshore fund may have to pay a low level of tax.
This is a tricky question. Offshore funds may be subject to a tax charge locally, but generally this is very low. As tax payments are low or non-existent, tax efficiency is not high on the objectives of the managers.
It is true, however, that there is often no double taxation agreement in place for these funds, so reclaiming withholding tax would not be possible.
Which of the following is/are TRUE of the capitalisation rate?
I. The seller of a commercial property would prefer as low a cap rate as possible in valuing their property
II. The higher the risk of the property the higher the cap rate
III. Where net operating incomes are generally increasing over time, cap rates also increase over time
IV. The Gross Rent Multiplier (GRM) is more reliable than using a Cap Rate calculation
A. I & II
B. III & IV
C. I, II & III
D. I only
A. I and II.
The net operating income is divided by a cap rate to estimate a value of a piece of commercial property. This is a ‘guesstimate’ as there are not many real transactions upon which to base more accurate market prices.
The lower the cap rate the higher the market value. So sellers will prefer to value their property using lower cap rates. The higher the risk of the property and its estimated cashflows, the higher the cap rate and the lower the valuation.
If income is increasing over time, then the property value should also be increasing over time, indicating that the cap rate is falling over time. The Gross Rent Multiplier is less reliable than using the cap rate approach.
An investor has £60,000 which was invested for two years. On sale, a significant capital gain was achieved. Assuming the rate of return is the same for each of the investments, which of the below would have given the investor the most tax efficiency?
A. VCT
B. EIS
C. ISA
D. NS&I savings certificates
A. Venture Capital Trust.
VCT shares do not attract any capital gains tax, regardless of the holding period, on investments up to £200,000.
EIS rules allow for no capital gains tax if held for at least three years, which this does not meet.
ISA would not allow for the whole investment over the two-year period.
The max deposit on NS&I savings certificate is £15,000, so could not invest the whole £60,000.
Theo, Peter and Duncan are all actively involved in Private Equity Investments. They have formed an investment company called ‘Three Dragons Capital Management’ and are evaluating a number of investment opportunities:
Opportunity A - Growth Capital Project
Opportunity B - Mezzanine Finance Project
Opportunity C - Venture Capital Project
Opportunity D - LBO
The Dragons have built their past success on demanding an equity stake in all their investment opportunities. Which of the following investment opportunities is/are most likely to provide them with an equity stake in the opportunity?
I. Opportunity A
II. Opportunity B
III. Opportunity C
IV. Opportunity D
A. I, II & III
B. I & III
C. III only
D. I, III & IV
B. I and III.
Venture Capital and Growth Capital are a form of equity financing. Whereas Leveraged Buy-Outs (LBOs) and Mezzanine Capital are primarily debt financing.
Which ONE of the following is not subject to corporation tax for a UK company?
A. Rental income
B. Dividends received from a UK company
C. Gains on disposal of property by the UK company
D. Interest income on the company’s bank accounts
B. Dividends received from a UK company.
Dividends received by UK companies are not subject to corporation tax. This is referred to as franked investment income.
Holly is looking at National Savings and Investment deposit based accounts. She prefers an investment that has a fixed term. Which of the following would be suitable to consider?
I. Income bonds
II. Children’s Bonus Bonds
III. Direct ISA
IV. Investment Account
A. I & II
B. II only
C. III & IV
D. I only
B. II only.
Only Children’s Bonus Bonds have a fixed term - five years. All the rest have an open term.
Which of the following best describes the expected changes to the UK population in the 21st century?
A. Grow at an increasing rate
B. Grow at a steady rate
C. Begin to decline at a slow rate
D. Begin to level off
D. Begin to level off.
It is estimated that the UK population in the 21st century will begin to level off.
