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R02 > Investment products > Flashcards

Investment products Flashcards

1
Q

OEICs and Unit Trusts are examples of open-ended collective investments. Describe what an open-ended collective investment is.

A

10 investors invest £100k each, thus fund has £1m to invest.
Manager creates 1m units so each unit = £1
1 year later, fund value has increased to £1.25m so each unit = £1.25
New investor invests £100k
Fund manager creates 80,000 new units (£100k/£1.25)
Fund can expand/contract at any time.
Essentially, the number of units is infinite.

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2
Q

What are the main IA categories?

A 
Capital protection
Income
Growth
Specialist
Those principally targeting an outcome i.e. targeted absolute return
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3
Q

What is the maximum percentage of an OEIC/UT that can be on borrowed money?

A

10% - retail funds temporarily, while non-retail funds can hold permanently

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4
Q

What is the income tax and CGT situation with OEICs/UTs?

A

CGT is liable on disposals if not held in a tax wrapper.
If non-equity OEIC/UT (>60% in interest bearing assets), income is classed as savings income and can be set against PSA.
If equity OEIC/UT (<60% in interest bearing assets), income is classed as dividend income and can be set against dividend allowance.

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5
Q

What is the difference between fettered and unfettered fund of funds?

A

Fettered - only invests in funds from the same management group
Unfettered - not obliged to invest solely in internal funds

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6
Q

What is the legal structure for an OEIC and a UT?

A

OEIC - company

UT - trust

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7
Q

What are the investor holdings for an OEIC and a UT?

A

OEIC - shares

UT - units

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8
Q

Who completes the independent oversight for an OEIC and a UT?

A

OEIC - depositary

UT - trustee

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9
Q

Who has the responsibility for the day to day running of an OEIC and a UT?

A

OEIC - ACD (authorised corporate director)

UT - Manager

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10
Q

What are the pricing structures of an OEIC and a UT?

A

OEIC - single (mid-market price)

UT - dual-pricing structure

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11
Q

How is a disposal treated for a reporting and non-reporting offshore fund?

A

Reporting offshore fund is treated as a disposal for CGT purposes, whereas a non-reporting offshore fund is taxed as income.

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12
Q

What is a dilution levy?

A

A mechanism to ensure that no-one can be adversely affected by anyone’s decision-making within the fund.

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13
Q

What is a split capital trust?

A

An investment trust that has multiple share classes entitled to different returns.

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14
Q

What is the difference between the diluted and un-diluted NAV?

A

Diluted NAV is calculated assuming all warrants and convertible loan stocks are exercised.

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15
Q

Is stamp duty/stamp duty reserve tax due on purchases of investment trusts?

A

Yes, otherwise it is subject to the same taxation treatment as OEICs/UTs

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16
Q

In what situation is a REIT subject to property income distribution (PID)?

A

When it is ring-fenced from corporation tax

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17
Q

What are the criteria for qualifying as a REIT?

A

Minimum 75% gross profit from property letting
Minimum 75% of assets in property letting
Interest on borrowings must be at least 125% covered by rental profits
Minimum of 90% of profits from property letting must be distributed

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18
Q

Why might an investor choose to invest in a REIT?

A

Liquid way of investing in property
Widely accessible to private investors
Tax treatment is closer to that of direct property investment

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19
Q

What criteria must a qualifying investment bond meet?

A
  • Premiums must be paid at least annually
  • Policy term must be a minimum of 10 years
  • Minimum life assurance cover must be 75% of the total premiums
  • Annual premium limit is £3,600
20
Q

List the situations where a chargeable event can arise on a non-qualifying investment bond.

A

DAMPS:

Death
Assignment for money or money's worth
Maturity
Part surrender in excess of 5% tax-deferred allowance
Surrender in full
21
Q

Why might a non taxpayer prefer an offshore to an onshore investment bond?

A

As there is no corporation tax within the fund, any chargeable events are taxed at normal income tax rates thus there is potentially zero tax to pay.

22
Q

How is tax levied on gains for an onshore investment bond?

A

As corporation tax is paid within the bond, it is deemed that basic rate of tax has been paid on any gains. The effective tax rates are therefore:
BRT: 0%
HRT: 20%
ART: 25%

23
Q

What are the two ways unitised With Profits funds pay out bonuses?

A

Fixed price system - bonuses paid by increasing number of units daily throughout the year
Variable price system - bonuses paid by daily increases in the unit price

24
Q

What is the maximum annual premium amount that can be paid into a Friendly Society policy?

A

£25 per calendar month OR

£270 single premium

25
Q

When might part and full surrender of an investment bond work well?

A

Part - when there’s a large gain on the bond and/or the policy has been running for a number of years
Full - Policy is in early years thus little gain (or even a loss)

26
Q

What is the difference between a synthetic and physical ETP?

A

Physical purchases the underlying assets, synthetic uses derivatives to match index return.

27
Q

What types of property investments could an investor choose?

A 
REIT
Listed Property Co shares
Property UTs/ITs
Insurance Co Property Fund
PAIFs
28
Q

What criteria must a firm meet to qualify for EIS funding?

A 
Less than 250 employees
Less than £15m in assets (£16m after raising funds)
Maximum £5m raised per annum
Must be in form of ordinary shares
Must be qualifying trade
29
Q

What income tax relief can you get from the following products: EIS, SEIS, VCT?

A

30% - EIS & VCT

50% - SEIS

30
Q

What is the maximum annual contribution an investor can make to the following products: EIS, SEIS & VCT?

A

EIS - £1m (+£1m for knowledge intensive companies)
SEIS - £100k
VCT - £200k

31
Q

What is the tax situation for the following products with regards to IHT, CGT and dividends: EIS, SEIS & VCT?

A

EIS & SEIS - dividends taxable, CGT exempt after 3 years, IHT exempt after 2 years
VCT - dividends tax-free, CGT exempt immediately, IHT liable

32
Q

How can an “Additional Permitted Subscription” help a spouse when it comes to IHT?

A

Allows spouse to put into an ISA the higher of the value of the deceased’s ISA at death or at the point it is passed on.

33
Q

In what scenarios do a put option and a call option make money?

A

Put option in a falling market

Call option in a rising market

34
Q

What is the difference between a futures contract and an options contract?

A

Future has obligation on both parties, option allows buyer to take up contract or let it expire

35
Q

What are the different strategies a hedge fund can employ?

A

Long/short
Relative value (arbitrage)
Event-driven
Tactical trading

36
Q

What’s the difference between hard and soft protection?

A

Hard protection offers 100% capital guarantee whereas soft is less

37
Q

Why might structured products be more exposed to counterparty risk?

A

Because the protection is often provided by a third party company in the form of a zero-coupon bond.

38
Q

Rank the following ETPs in order of most to least likely to be synthetic: commodities, funds, notes

A

Most - Notes

Least - Funds

39
Q

What are the benefits and drawbacks of investment bonds?

A

Benefits: easy fund switching (no CGT); can be assigned to lower rate taxpayer (i.e. interspousal); No CGT; Income tax deferment good for those who expect tax rate to decrease; good for trust investments
Drawbacks: non-reclaimable tax within fund (onshore) - not good for non-taxpayers; can’t use CGT allowance; income tax deferment not good for those who expect tax rate to increase

40
Q

Which fund is more likely to have a lower expense ratio: a managed fund or tracker fund?

A

Tracker fund

41
Q

Why might leveraged ETCs be more volatile?

A

Their price movements are multiplied by a factor, so returns can be higher but so can losses

42
Q

Is SD/SDRT liable on ETPs?

A

No

43
Q

According to UCITS diversification rules, what is the maximum a fund can invest in one security?

A

10% in up to four different securities, 5% thereafter

44
Q

What is the minimum proportion of a PAIF that must be invested in property investments?

A

60%

45
Q

What is the main difference between American and European style options?

A

American-style can be exercised at any point up to the exercise date, whereas European-style can only be exercised on the exercise date

46
Q

What two investments will typically make up a structured product?

A

Zero-coupon bond, providing the capital protection

Call option, providing the extra return

47
Q

What do hurdle rates indicate?

A

The hurdle rate is the required growth rate of a split capital trust to repay all share classes at wind-up date at either current purchase price or pre-determined redemption value.

R02 (7 decks)

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