Investment Products

Question 1

What is the Net Asset Value (NAV) of a collective

Answer 1

is the value of its assets less its liabilities

Question 2

What is a closed-ended fund and give an example of a closed-ended collective investment fund

Answer 2

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.

Question 3

What is the function of the authorised corporate director?

Answer 3

the management of Open-Ended Investment Companies

Question 4

What type of split capital investment trust share provides a pre-determined return to investors when the trust is wound up?

Answer 4

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.

Question 5

How are capital gains taxed within an open-ended investment company

Answer 5

• 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.

Question 6

How are gains on disposals made by offshore reporting funds taxed on the investor?

Answer 6

be subject to tax on chargeable gains

Question 7

Explain what is meant by the dilution levy.

Answer 7

Is also known as the dealing charge.

It is a charge which may be imposed by the manager to cover dealing costs

Question 8

What is the current annual individual savings account (ISA) allowance?

Answer 8

The annual ISA investment allowance for the 2019–20 tax year is £20,000

Question 9

How much can a policyholder withdraw each year from an investment bond without triggering a liability to tax?

Answer 9

Policyholders can withdraw up to 5% of their original premium annually

Question 10

Which National Savings & Investments (NS&I) products are liable for capital gains tax (CGT)?

Answer 10

None of NS&I’s products are subject to CGT, but some

products are subject to income tax.

Question 11

How do capital redemption bonds differ from other investment bond policies?

Answer 11

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.

Question 12

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:

Answer 12

Teresa will have the least diversified investment

Question 13

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?

Answer 13

Capital gains are subject to CGT and distributions are subject to income tax

Question 14

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:

Answer 14

the liquidity risk of Helens investment is likely to be greater than the liquidity risk of Peters investment

Question 15

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?

Answer 15

Shelleys investment is more likely to be at risk from gearing than Annes investments

Question 16

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:

Answer 16

Gavin`s investment is the one likely to be most influenced by supply and demand factors

Question 17

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?

Answer 17

Arrangement for encashment of your holding

Question 18

Which of the following would be an effective way of deferring the tax liability on a realised gain to a later date?

Answer 18

Investing in an enterprise investment scheme

Question 19

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:

Answer 19

Guaranteed Growth Bonds

Question 20

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?

Answer 20

Only Paul`s approach can be structured to ensure immunity from capital gains tax

Question 21

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?

Answer 21

Only Bob, Sharon and Norma`s investments triggered an increase in fund size

Question 22

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?

Answer 22

Fund C is likely to benefit the most from a sudden rise in the stock market

Question 23

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?

Answer 23

Stepped preference shares in an investment trust

Question 24

What are the benefits for investing in an open-ended fund:

Answer 24

1. Liquidity
2. Access to large denomination securities
3. Diversification
4. Cost
5. Managerial expertise

Question 25

What is the definition of NAV per share

Answer 25

NAV – the total value of a fund’s assets, less liabilities.
NAV per share/unit – the total NAV of the fund, divided by the number of shares in issue.
It is calculated at least once a day and represents the value of the underlying securities that are contained in each mutual fund share.

Question 26

Fund ABC has a portfolio valued at £1 million of assets under management (AUM).
It is made up of 1,000,000 Fund ABC’s shares.
Therefore, the net asset value per Fund ABC share is:
£1,000,000/1,000,000 = £1 for each of Fund ABC’s outstanding shares.
A new investor has £100,000 to invest.
How many shares of the ABC Fund will this buy them?

Answer 26

Shares are priced at £1 each so it will buy the investor 100,000 shares in the Mutual Fund company.
Two things happen to the fund:
• It gains £100,000 in assets.
• 100,000 more shares are created to give the investor their holding.
The number of shares in the fund is therefore:
• the original 1,000,000 plus 100,000 new shares issued = 1,100,000.
The assets of the fund are:
£1,000,000 (the original portfolio)
£100,000 (new cash paid by the investor for their shares)
= £1,100,000.
The NAV per share is therefore £1,100,000/1,100,000 = £1 per share – ie, unchanged by the introduction
of a new investor.

Question 27

The term ‘transferable securities’ in the UCITS acronym is defined as:

Answer 27

1.shares in companies or other securities that are
treated equivalently to shares in companies

2.bonds and or other forms of securitised debt
securities

3.any other negotiable securities carrying the right to
acquire such securities by subscription or through an
exchange.

Question 28

What is Exchange-traded funds (ETFs)

Answer 28

• Like tracker funds, they follow the performance of an
  index closely
• Tracking a variety of indices

Question 29

Investment Trusts is:

Answer 29

• a public company not a trust

-

Question 30

Real Estate Investment Trusts (REITs)

Answer 30

• more tax-efficient than property UT or Property
  Investment Trust
• are required to distribute 90% of their tax-exempt
  income profits to investors.
• pays no corporation or capital gains on the profits
  made