Investment Products Flashcards
What is the Net Asset Value (NAV) of a collective
is the value of its assets less its liabilities
What is a closed-ended fund and give an example of a closed-ended collective investment fund
The other type of mutual fund is a closed-end fund, which is so called because it does not accept any
new money or redemptions while the fund is being managed. The fund’s shares are issued to the public
when the fund makes its debut in an initial public offering (IPO). The shares are then listed on a regulated
exchange, such as the LSE. Thereafter, investors trade in and out of these shares in the secondary market
on the exchange. A unit investment trust is a good example of a closed-end fund.
What is the function of the authorised corporate director?
the management of Open-Ended Investment Companies
What type of split capital investment trust share provides a pre-determined return to investors when the trust is wound up?
Split capital investment trusts usually have a limited lifespan and their various share classes are intended
to appeal to different types of investor.
• Some classes are made up of shares which provide pure capital growth, in forms that range from the
safe to the very risky.
• Some classes may provide relatively high levels of income
Stepped preference shares – these have an income entitlement which grows at a predetermined
rate; they also carry a predetermined maturity value. They are not particularly common, but can
appeal to investors who need certainty of future income and capital returns
Zero dividend preference shares or zeros – zero dividend preference shares pay no income but
offer a predetermined rate of return when the investment trust is finally wound up.
Zero holders have first call on the investment trust’s assets, when it is wound up, after any bank
loans are repaid.
The return on zeros is not guaranteed (there may be insufficient assets left at wind up, after all)
but there is a very strong likelihood that the return will be paid because of their prior claim on
the investment trust’s assets. Other classes of shares receive nothing until the zeros have been
paid.
The final redemption value of the zero at the liquidation date is predetermined, subject to the
investment trust actually having enough assets to cover this at that date. Zeros are, therefore,
issued at a price which usually rises by a compound growth rate to the final value.
The returns on zeros are taxed as capital growth rather than income, and they are particularly
attractive to investors who are not subject to CGT – or to those who are able to use their CGT
exemption.
How are capital gains taxed within an open-ended investment company
• Capital gains made within an OEIC are exempt from tax.
• Capital gains made by a taxpayer on any disposal of the OEIC may trigger a CGT liability depending
on whether they have exceeded their annual CGT exemption. If they make a loss, this may be offset
against realised gains made elsewhere. Such losses can be carried forward indefinitely if they have
no gains to offset in the year they dispose of their OEIC holding.
How are gains on disposals made by offshore reporting funds taxed on the investor?
be subject to tax on chargeable gains
Explain what is meant by the dilution levy.
Is also known as the dealing charge.
It is a charge which may be imposed by the manager to cover dealing costs
What is the current annual individual savings account (ISA) allowance?
The annual ISA investment allowance for the 2019–20 tax year is £20,000
How much can a policyholder withdraw each year from an investment bond without triggering a liability to tax?
Policyholders can withdraw up to 5% of their original premium annually
Which National Savings & Investments (NS&I) products are liable for capital gains tax (CGT)?
None of NS&I’s products are subject to CGT, but some
products are subject to income tax.
How do capital redemption bonds differ from other investment bond policies?
Capital redemption bonds are life company products without an insurance element – ie, there is no life
assured. Instead they are used purely for investment purposes, and so they only pay out on the expiry of
the bond or an early encashment by the policyholder.
Four investors have chosen to put similar amounts of money into gilts, but each has adopted a different method.
Tim has chosen an OEIC.
Ray has opted for an investment bond.
Teresa has used the Debt Management Office.
Rachel has selected a unit trust fund.
It is therefore reasonable to assume that:
Teresa will have the least diversified investment
A UK domiciled taxpayer holds an offshore ETF that has reporting fund status in the UK. What will be the tax treatment for any capital gains or distributions are not remitted to the UK?
Capital gains are subject to CGT and distributions are subject to income tax
Rachel invested £100,000 in an Enterprise Investment Scheme.
Helen invested £100,000 in a Venture Capital Trust.
Peter invested £100,000 in an OEIC equity fund.
Based solely on this information, it is reasonable to conclude that:
the liquidity risk of Helens investment is likely to be greater than the liquidity risk of Peters investment
Anne has £12,800 in unit trusts (Japan Fund) and £8,400 in OEICs (North American Fund).
Shelley has £16,600 in investment trusts (UK Equity).
Moira has £18,200 in Real Estate Investment Trusts (REITs).
Based solely on this information, which of the following is CORRECT?
Shelleys investment is more likely to be at risk from gearing than Annes investments
Paul holds 600 units in a unit trust.
Gavin holds 1,600 shares in investment trusts.
Maurice holds 2,200 shares in an open-ended investment company.
Comparing these three holdings, it is reasonable to conclude that:
Gavin`s investment is the one likely to be most influenced by supply and demand factors
You are analysing the key features of a hedge fund. Which area differs significantly and would require more evaluation compared to other indirect investments such as an onshore OEIC?
Arrangement for encashment of your holding
Which of the following would be an effective way of deferring the tax liability on a realised gain to a later date?
Investing in an enterprise investment scheme
A National Savings and Investment product which requires a minimum holding of £500 and has a maximum of £1,000,000 provides annual interest that is paid net to the investor and where access is available before maturity subject to a loss of 90 days interest, describes:
Guaranteed Growth Bonds
Simon holds commodity futures in different energies such as gas and oil. Paul holds an exchange traded commodity fund that tracks a single energy commodity index within his ISA.
Which of the following statements is TRUE?
Only Paul`s approach can be structured to ensure immunity from capital gains tax
Bob invested £2,200 in OEICs.
Sharon invested £4,800 in exchange-traded funds.
Martin invested £6,300 in investment trusts.
Norma invested £8,500 in unit trusts.
Which of the following statements is TRUE?
Only Bob, Sharon and Norma`s investments triggered an increase in fund size
Three funds are a similar size, invest exclusively in growth-orientated blue chip UK equities and have medium risk profiles.
Fund A is an investment trust which is not geared up.
Fund B is a unit trust which has no borrowing powers.
Fund C is an investment trust which has substantial gearing.
Based solely on this information, which of the following statements is TRUE?
Fund C is likely to benefit the most from a sudden rise in the stock market
Michael, a basic rate tax payer has £3,000 to invest and a moderately aggressive risk profile. He sometimes exceeds his capital gains tax free allowance and is keen to avoid this situation in future years. He also needs a fairly regular income stream with no additional tax to be paid on his personal tax return.
Which investment is the closest match for his requirements?
Stepped preference shares in an investment trust
What are the benefits for investing in an open-ended fund:
- Liquidity
- Access to large denomination securities
- Diversification
- Cost
- Managerial expertise
